FX Trading

An FX trader is any individual who exchanges one currency for another. Individual traders commonly use different platforms to exchange foreign currency. These include banks, financial institutions, money changers, or FX brokers. Most trades are completed over-the-counter, which means that the trade is facilitated via a bank rather than a centralised entity.

PIP is the abbreviation of “point in price” or percentage in point” and it is the smallest unit of price movement in the foreign exchange market. For example, when the exchange rate of EUR/USD moves to 1.1552 from 1.1550, the currency pair has risen by 2 pips (or 0.0002).

Forex scalping is a trading strategy which aims to benefit from small price movements in the market. Scalp traders will target intraday price movements and only hold positions for a small amount of time to take advantage of small market opportunities. Forex scalpers must be prepared to monitor the markets all day long.

Forex leverage is offered by brokers to enable traders to maximize their trading potential. The forex market offers higher leverage than other markets, and this attracts potential traders. Leverage allows traders to deposit small amounts and trade with high volumes. The term ultimately means borrowing money in order to increase the potential returns on a trade, but this means losses get increased too.

The difference between the ask price and bid price is known as the spread. The spread represents the cost of a transaction; the lower the spread, the lower the cost. A spread is influenced by a number of factors: the supply of the asset, the stock’s trading activity, and the total demand or interest in a particular asset.

Hedging is a technique designed to reduce the risk caused by adverse price fluctuations. Investors and traders might implement a forex hedge in order to protect their position from risk as exchange rates change. Foreign currency options are a common hedging method, and grant the trader the possibility to buy or sell at a future exchange rate.

A swap is simply an exchange of one currency for another. At a later date, the two parties who made the swap will receive their original currency back with a forward rate. The forward rate locks in a specific exchange rate and therefore acts as a kind of hedge. The swap varies significantly among different financial instruments.

A drawdown is the difference between a relative peak and a relative trough in the value of an investment. After a new high is reached, drawdowns track the percentage change between the previous high and the smallest trough. In this way, drawdowns are useful for determining the financial risk of a certain asset.

Slippage refers to the difference between the requested price of a trade and the price at which it is eventually executed. Slippage is usually found when the markets are particularly volatile, and prices have moved quickly during the time it takes for the trade to be ordered and completed. Slippage can have positive and negative consequences.

These are fundamental indicators which directly or indirectly point towards a weak or strong economy.

Macroeconomic indicators based on the Gross National Product (GNP) and the Gross Domestic Product (GDP) are used to estimate an economy’s efficiency.

This data is then released in reports which have major effects on a country’s currency. Aside from GNP and GDP, some of the major macroeconomics are:

• Unemployment rate
• Bankruptcies
• Retail sales
• Consumer leverage ratio

These types of events have direct or indirect consequences, either worldwide or for a particular set of countries.

Geopolitical events have great psychological and emotional consequences for the equity and currency markets.

A few examples of such events including:

• Trade wars between major countries or economies which arise due to rising tensions among nuclear-armed, powerful countries.
• Major decisions taken by OPEC (Organization of Petroleum Exporting Countries), which have direct effects on oil prices.
• Major events like Brexit, which trigger volatility into worldwide stocks and currency markets.

Gross domestic product (GDP) is a financial economic indicator which measures the total value of goods and services produced in a country, over a designated period of time.

The GDP is one of the most important indicators, and is used to evaluate a nation’s overall economic health. Construction costs, government outlays and investments all contribute to a country’s overall GDP. Inflation is an economic indicator that measures the increase of a country’s prices for major goods and services.

The rate at which prices are rising dictates the rate at which the purchasing power of the currency is falling. In order to maintain a smooth economy, central banks aim to limit inflation and avoid deflation.