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Forex Trading: Currency Exchange Basics

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One of the best ways to make huge profits in stock market is through forex trading. It is done in currency exchange. Professional traders refer to this as foreign exchange, but many investors also use the acronyms Forex or FX.

Let us understand below what is futures and options trading in FX currency futures.

How Currency Exchange Works

Currency exchange is necessary to liquidate the market. It also help in different transactions happening daily in global trade. They go to a bank or currency exchange bureau to convert their native currency into the currency of the country they intend to travel to. This way they sort of do forex trading but for necessity.

Equity investors always fear a bear market, or a declining market that erodes principal, while waiting for the markets rebound. Whether the U.S. dollar or Japan Yen or Indian Rupee reaches record highs or lows, the currency market is active and liquid. It is not solely dependent on one particular country, though the currency trading mostly revolve around US dollar and Euro.

Profit opportunities are equal in a rising, or, a falling foreign exchange market. An astute investor does not need a directional bias. Often a profit is made in a market that is “trending”, then an equal opportunity exists as the market retracts. Either way, or both, currency speculation offers tremendous opportunities. So what’s the hard part? Knowing which way the market will move and why, having the proper contracts, and staying up all night.

That’s where you need expert forex broker on board. Most brokerage firms offer managed account, this way you let professionals do the decision making for you. Forex brokerage firms use the most advanced and sophisticated trading methods to secure the best market opportunities for your investment capital. They have experience and tools to understand the market in depth.

Advantages of Forex Trading

Forex trading differ from stocks due to certain advantages that it comes with:

  • It offers 24-hours trading access (Sun. 7 p.m. – Fri. 3 p.m.).
  • Trading volume on a daily basis is often 100 times greater than that of local stock exchange.
  • Equal profit can be made in an increasing, or decreasing market.
  • Your investment in rupees are “leveraged” to maximise opportunity.
  • You can trade in foreign currency without transacting in local currency.
  • In India, futures trade in four currency pairs and F&O in three cross-currency pairs (USD-JPY, EUR-USD and GBP-USD).
  • Currency trading in India are available for traders in the following pairs only: (USD/INR); (EUR/USD); (GBP/USD); (EUR/INR); (JPY/INR);(GBP/INR) and (USD/JPY).
  • You can trade at values that is equal to 100 times your deposit amount.

How Forex Trading is Done?

Currency values moves in increments called “PIPS.” “PIPS” are measured as percentage points between each whole number of any given world currency.

Let us take mock example of USD and YEN.

There are 100 “PIPS” or percentage points, between each full currency increment; as an example, the value of the Japanese Yen between 107.00 and 108.00 equals 100 “PIPS”.

  • 100 “PIPS” exist between the Yen at 108.00 and 109.00
  • Suppose each “PIP” is worth approximately $12.74 when the Yen is 108.00

A typical trade may look like this:

  • Buy JapaneseYen @ 109.00
  • Sell JapaneseYen @ 108.00

Outcomes of above mock trade:

  1. This trade would result in a 100 “PIP” move at a value of 12.74 per “PIP”, or 100 “PIPS” x 12.74 (profit per “PIP”) = 1,274.00 profit.
  1. This would return a profit of 127.4% on investor capital of $1,000 (every $1,000 controls $100,000)

A 100 “PIP” movement can happen in a matter of minutes, or hours.

Suppose, during the past year, the Yen has traded between 135 and 101 in your online trading account. It is not uncommon for the Yen to move a full 3 to 5 Yen during one or two 24 hour periods.

This volatility offers immense profit opportunities not only in the Yen, but also the British pound, Swiss franc, and the new Euro, the major currencies that we trade.

This is how forex trading works and investors make high returns from it. Download stock trading app to start FX futures trading today.

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