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Forex Trading| Article #227 : FOREX TRADING – CURRENCIES AND MORE

In this installment of our odds and ends series, we’re going to get a little more in depth into the practice of Forex trading, covering the common currencies and some common Forex trading terms and practices. Hopefully, by the end of this article, you’ll have most of the basics needed to actually venture into the world of Forex trading.

As we explained in our previous article, Forex trading is simply the trading of one currency for another. The combination of currencies in this trade is referred to as a cross.  To be more precise, the buyer purchases one currency with another.  For example, buying Euro dollars with US dollars, would be a cross with the designation EURUSD. The most common traded currencies are EURUSD, USDJPY , USDCHF and GBPUSD. These are called the major exchanges.

The largest market for Forex trading is called the spot market. The reason it’s called the spot market is because these particular trades are settled right away, or on the spot. In the real world, this comes down to two banking days. That is about as quick as a Forex trade is going to go down.

There is then something called “forward outrights.” With a forward outright, even though the date of the trade is carried out immediately, there is an interest rate calculation which has to be done. This causes a delay in the trade. This usually doesn’t affect the trade itself unless you are planning on holding onto a position for a long period of time.

The interest rate differentials vary greatly depending on what currencies are being traded. For example, if you were trading USDCHF, the interest rate differential would be very small. However, if you were trading NOKJPY, the interest rate differential could be quite large. The reason for this is because in Norway you’d get about 7% interest and in Japan the interest rate is close to 0%. So if you’re borrowing money in Japan and trading it for Norwegian currency, you would actually get a positive differential. This differential has to be calculated when making a trade. In some cases this works for you and in other cases it works against you.
When engaging in Forex trading, you must always be aware of the interest rate differentials, as these things can mean the difference between making a profit on your trade or losing money on your trade. This is why people who are actively involved in the Forex market are always on top of these things. One of the reasons why you can’t just casually get into Forex trading, unless you have a lot of money that you can afford to lose.

In our next installment on Forex trading, we’ll get into trading on margin and some reasons why it’s a good idea to get into Forex trading, as long as you know what you’re getting yourself into.

See you next time.

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