Start Here to Learn to Trade Advanced: Premiums are another important concept when trading Forex. Although the spot market is commonly known as one that deals with transactions in the present rather than the future , these trades actually take two days for settlement. Forex You are here: Namely, there are eight most traded currencies in the forex market.
Test Your Knowledge: What is the Forex Market
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter OTC , which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone.
This means that when the trading day in the U. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.
Spot Market and the Forwards and Futures Markets There are actually three ways that institutions, corporations and individuals trade forex: The forex trading in the spot market always has been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on.
In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading and numerous forex brokers , the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators.
When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future. What is the spot market? More specifically, the spot market is where currencies are bought and sold according to the current price.
That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations both locally and internationally , as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value.
After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present rather than the future , these trades actually take two days for settlement.
What are the forwards and futures markets? Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement. Your margin for a given trade is the amount of account equity required as collateral on deposit with a broker or market maker throughout the life of the position.
Margin is offered in a number of standard configurations: The amount of margin required to support a position varies with the trading rate of the currency. At to 1 leverage the original position would require Understanding margin is important not only for managing your individual trades, but also for managing your entire account. These are the funds that can be used to open new positions. Premiums are another important concept when trading Forex.
Premiums are interest payments that a given position may pay or earn when being held through the trading day roll over. Roll-over refers to the closing of every open position at the end of each trading day and the subsequent re-opening of the same position for the next day.
The roll takes place at 5: When this occurs the interest that has been earned or indebted on each open position is reconciled to the trading account. The amount of interest is calculated by taking the difference between the interest rate of the Base Currency and the Counter Currency and calculating the difference across the number of units held for a given position.
If the amount is positive, your account is credited the amount. If the amount is negative then your account is debited. On a SELL order or short position you subtract the Base Currency interest rate from the Counter currency interest rate to determine if your account is credited or debited. Lastly, it is imperative that a trader knows how to determine the profitability of their trades.
A day later that position is closed at a ASK rate of In effect the trader received 1,, JPY when the position was opened and paid out 1,, JPY when the position was closed.