More about Retail Forex Currency Trading December 8, 2009 at 11:23 pm
A person is said to be trading in the foreign exchange market at the retail level if he is not associated with a large bank, investment firm, or any other government agency. You will be working with a forex broker who is also known as the middleman and will be entitled to use much larger amount of money for trading then the actual amount that is present in your account. This practice is better known as trading on leverage. For example, if you have a leverage ratio of 100:1 then you are entitled to control a trading position of $100,000 when you have actually invested only $1000.
Generally people do not consider in the foreign exchange market. Only when they travel to some foreign country or buy some international property, their foreign exchange transactions occurs. A trader who is involved in foreign exchange market is very cautious about the exchange rate when such extent of foreign exchange is involved. This is the reason why, exchange rate is mentioned to the hundredth of a penny position in most of the forex trading software platforms. A very popular term is often used ‘Pip’. It is nothing but the fluctuation in the exchange rate. So, if there is a change by 100 pips, it is considered as one penny in the eyes of a foreign traveler.
A penny does not make a big difference to the foreign traveler but think about some trade situations where thousands or millions of dollars is involved. A slight change in the exchange rate will add up to a huge amount. Suppose $100,000 is involved on a standard forex trading platform and when such high trade is involved, a fluctuation by a single pip would be equivalent to $10. Therefore, if you manage to acquire 100 pips of fluctuations on an open position or an exchange rate difference worth a penny, it is equivalent to earning $1000 on your open trade or doubling the trading capital size for the specific trade. These permutations and combinations proves how important leverage is and what difference it can make to your bottom line profits and also control the rise or fall in your account balance.
You must have heard of forex trade brokers who offer trading without charging any additional cost. But make this point very clear, it does not mean that you can trade freely in the market. The broker earns his commission by creating a small difference between the buying price of the currency and the selling price of the currency. This price difference is better known as the ‘Spread’. This is the reason why there is a small price spread associated with the popular currency pairs as compared to the more unusual and less traded currency pairs.
