Top 4 questions about Forex trading answered
On a daily basis, the Forex market produces around $4 trillion worth of transactions. This is more than the major stock market exchanges put together. Despite this ‘foothold’ in the trading world, there are still a range of questions that new traders seem to scratch their heads over. So,in this article we are aiming to answer at least some of those in order to provide more insight.
1. Does the Forex market have a central exchange?
No. The Forex market does not operate in a traditional way like a stock market environment. For example, NYSE and Dow Jones are probably the most recognizable exchanges in the world where various companies are listed on. The price for a currency pair does not arrive through a central exchange but through a conglomerate of major financial players in the market such as banks, hedge funds and other investment companies. They are referred to as the Interbank market. This is why you will not be able to see a volume bar in your charts that represents the total number of transaction for a currency pair in a particular session. If you see a volume bar it represents the number of transactions undertaken through your broker – not the world.
2. What is a pip?
PIP is short for ‘percentage in point’ and it is the only measured reference tool used in rise and fall of prices. Despite the fact that a lot of brokers operate on a 5 decimal place basis, prices are generally quoted on a 4 decimal basis. It is the change of the fourth decimal place that is referred to as a pip. So, is a price for a currency pair increases from 1.2345 to 1.2350, we say that price has increased by 5 pips. When you exchange money at an exchange counter at an airport, you may not be able to see the actual exchange rate because they are shortened to two decimal places to make it easier to understand, so the price will be 1.23.
3. If we buy and sell stocks in the stock market, do we buy and sell currencies in Forex?
No. Technically speaking, you are not buying or selling anything. Forex trading is simply a computerized version of currency price prediction against one another. The actual reason for the sheer existence of the Forex market is so that large and international companies can buy and sell goods and services across the globe. This continual fight for currency price is what helps them to trade more efficiently. The rest of the market is simply based on speculation which is derived from economic data that is released on a daily basis.
4. Is the Forex industry regulated?
No. This is a very touchy subject at the moment. Whilst there is a degree of certainty focused towards regulated brokers the actual market does not receive this kind of a ‘watchful eye’ over it. For instance, various brokers that receive the same market price from the Interbank market can alter that price through their platform. As they mark it up the spread widens and you pay a higher premium when you trade. Ideally, all prices should be the same right? This is not the case in Forex. However, there have been recent developments where a regulatory concept is urged by a few major players in the market so only time will tell if this will come true.
I appreciate there are more questions to be asked and answered on this subject but hopefully the above answers to the above questions should provide a bit of insight into the issues.