Forex Currency Trading Questions Answered

Forex currency trading is unlike any other type of investing in the world. We've gathered some of the most common questions surrounding the Forex market and answered them here. If you are interested in the Forex market or simply want to know more about it, in general, here are some frequently asked questions.

How is it Different?

Forex currency trading is different from other types of trading. While the basic concepts are the same, it does not share many of the same practices. For example, the market does not take place on a centralized exchange as is the case with the stock market. Instead, the market takes place between large banks, Forex brokers and other entities.

It is open 24 hours per day five days per week.

Individual traders to trade in the market have to use leverage to be able to trade enough money. Lots are traded with 100,000 units of currency. To be able to trade, a regular trader works with a Forex broker who provides large leverage (like 50:1 or higher).

Another way that the Forex market is different is that it is extremely large. According to the Wall Street Journal, the Forex market involves $4 trillion exchanging hands every single day.

How is Money Made?

Money is made in the Forex market by trading Forex currency pairs. Forex is essentially a zero-sum game. This means that when you make money, someone else is losing money. It is not like the stock market in which the value of shares increases based on underlying factors.

With this market, you buy and sell currencies at the same time. Currencies are paired together in Forex currency pairs. You buy one currency and sell the other every time you make a transaction. You hope that the one you buy is increasing in value while the one you sell is decreasing in value.

What's a Pip?

Pip is not a name for a little homeless boy who needs a Christmas ham. At least not when talking about the Forex market. Forex pips are the smallest unit of measurement in the Forex market. Since you are trading one currency against another, you cannot simply say that currency is moving in dollars. Instead, it moves in pips. When looking at a quote, the pip value is the fourth decimal point. The exception to the rule is when dealing with pairs that have the Japanese Yen involved. In those pairs, it is the second decimal point. Pip stands for percentage in point.

How Do Brokers Make Money?

In the Forex market the commissions work a little differently than what you are used to with other markets. For example, in the stock market, you pay a commission each time you buy a stock. With the Forex market, you do not necessarily have to pay a commission with most brokers. Instead, the broker is compensated with the difference between the bid and ask price. The Forex spread is how most brokers make their money. Some also charge a commission on top of that.



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