But what is forex trading? Forex trading is simply the buying and selling of currencies. When someone says Eurusd is trading at 1. But before you get all excited to start trading the forex markets, there are 5 things you must know before opening your forex trading account. If you have ever traded stocks, you will have to pay a commission as well as the spread on it.
The spread being the difference between the bid and offer. So the spread for Keppel Corp is 10 cents. So in order to trade stocks you have 2 transaction cost to cover, the commission and the spread. But what about forex? If you made profits, your equity will be added accordingly. Likewise if you sustain losses, your equity will be deducted accordingly.
Forex trading is a leveraged instrument. It is not uncommon to see broker offering 1: But leverage is a double edged sword. And this is the reason why you hear stories of traders busting their trading account. They are leveraging excessively relative to their account size, even a small price movement against them is enough to wipe out their trading capital. In forex trading, there is something called the carry trade. When you have a positive carry trade, it means that the currency you are long pays a higher interest rate than the currency you are short.
You are long Audjpy, this means you are buying the Aussie and selling the Yen. The Aussie currently pays interest of about 2. So there is always a possibility of counter party risk. And for you the retail trader, your counter party risk is usually your broker. Your transaction size in the forex market is too small to even reach the interbank market.
So what happens most of the time is your broker would take the opposite side of your trade. After which the broker would pool these retail orders together and hedge it on the interbank market. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram DNSsingapore to get your daily dose of finance knowledge through photos.
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