How A Currency Trader Works in The Foreign Exchange Market
The most actively traded market in the world is the foreign exchange market. On average, over $5 billion is sold daily. Foreign exchange/Forex is mostly an over- the- counter market, which means trading happens on electric trading platforms and through telephones between banks and different market payers. Only 3% of Forex is traded on exchanges as futures and options.
Currencies from each country worldwide form the foreign exchange market, but most of the volumes are made up of a few currencies. These are the most traded and are also known as the major currencies. These include:
- USD: United States / Dollar
- EUR: Euro Zone / Euro
- JPY: Japan / Yen
- GBP: the United Kingdom / Pound
What do Currency Traders Do?
The role of currency traders is to move currencies around the world from one currency to the other for different reasons and several other functions.
Identification
Currency traders simply trade one currency for another. Government, corporations, and various financial institutions move colossal amounts of money from one country to the next per day as part of day-to-day operations. However, the most significant part of currency trading is speculative trading, which takes up 80% of the trade. Traders of all sizes, such as individuals and hedge funds trade by buying and selling currencies and hope to profit off their fluctuations. There are no physical exchanges, and it all happens online, with trading going on every business day, for 24 hours nonstop. Don't use plagiarised sources.Get your custom essay just from $11/page
Types
Every nation on earth has a currency that has value against other currencies. That value against other currencies is the exchange rate. Currencies tend to trade in pairs, with each pair traded as a product. For instance, the U.S dollar and the Euro, which are the most popular and most traded pair, might be exchanging at $1.3475 per Euro. In this case, it is quoted as EUR/USD= 1.3475. If the rate drops and the dollar declines, it means you need more U.S currency to buy Euros. The quote will change to (as an example) EUR/USD= 1.4055
Features
To understand how currency traders operate, you need to know some of the elements involved in currency trading. One key term you must know is the percentage in point or pip. The pip is the smallest amount in which a currency can be changed. For the EUR/USD pairing, the pip is 1/100 cents ($0.0001). When a buyer bids or offers, and the seller asks or states their price, the difference in the bid/ask is called the spread. For wholesalers in the currency trade, the spread is between 1 and 2 pips. Retailers typically set the spread high, from between 3 to 20 pips. Rather than charge a commission, they keep the difference as their payment. Whether at wholesale or retail, the currency trader endeavors to guess which direction the market will take. If their guess serves them well, and the fluctuation in exchange rates is favorable by beating the spreads, the trader profits.
Functions
The Forex is famous for its potential for high profit and the same risk factors. This is primarily because currency trading happens on margin. It is usual for a ratio between a lot, typically $100,000, and the margin requirement to reach up to 400:1. This means the trader has to pay $250 to purchase $100,000 worth of currency. As a result, the change of even 1 pip becomes critical. A small change in exchange rates can double the trader’s cash, or wipe out the money put up to meet the margin demand.
Conclusion
A good currency trader has to be both willing to take risks and also practice some caution by carefully analyzing situations. A currency trader has to study and stay informed of national trade policies and announcements by central banks around the world while keeping abreast of market pattern trends. To become a currency trader, you must look for a good broker who will give you reasonable prices, real-time quotes, and online trading software. You must be careful when choosing your dealer as the currency market is mostly unregulated. In Hong Kong, it is best to select s broker who belongs to a self-regulating organization such as the Hong Kong Futures and Securities Commission.