Spot Forex Trading
Other Terms
Spot Forex pairs and Markets:
Forex trading happens in the form of a currency pair. There are 28 major currency pairs. The most traded forex pairs are EURUSD (Euro and US Dollar), USDJPY (US Dollar and Japanese Yen) and GBPUSD (British Pound and US Dollar). The major currencies that are traded in the Forex markets are US Dollar (USD), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (PPY), British Pound (GBP), Australian Dollar (AUD) and Swiss Franc (CHF).
Forex market, the largest financial market in the world, consists of banks, investment companies, commercial organizations, central banks, retail brokers, and traders. It is an Over-the-Counter market that is open 24 hours a day for five and half days. It is not ruled by single exchange, rather by a worldwide network of brokers and individual investors. There is also an interbank market, where big financial institutions trade on currencies for hedging purposes.
Benefits of Spot Forex Trading:
- As it is the biggest financial market worldwide, it offers more opportunities because of accessibility, liquidity, technology, and trading hours.
- It is useful for novice traders as it is easier to enter and exit from the trade. Moreover, a trader doesn’t need a big chunk of capital to start trading. Furthermore, a lot of brokers offer demo accounts to enable practicing with real data before trading real money.
- Because of the large liquidity in the market (especially in the major currency pairs), it is easier to enter and exit at the desired price (if market hits the price) without much of a slippage.
- The Forex market is affected by several factors, such as the global economy, the economic stability of the country, political situation, natural disasters etc. This causes frequent movements in the currency valuation, which provides excellent trading opportunities.
- Due to the decentralized nature of the Forex market, much advanced technology is used for trading Forex, making the trades seamless and faster.
Trading Spot Forex for regular Income:
- Forex can be an excellent asset class to trade to generate regular income. However, the right strategy, education and discipline is necessary to avoid sustained losses and loss of capital.
- The small account size requirement makes it attractive to many novice as well as experienced traders to trade Forex for regular income.
- Since the Forex market is very large and the liquidity in the major currency pairs is very high, the trades can be almost linearly scalable. For example, if a trader can profit $100 from trading $1,000 worth (using leverage), s/he can profit $10,000 from trading $100,000 worth. However, the risk of losing money is also quite high, if the market goes in the reverse direction and proper risk management / stop loss strategy is not deployed.
- A trader should be aware of currency pairs, popular pairs and the ones that are most traded. A trader should research and understand the economy of the countries they are trading on. Traders should know the benefits and risks involved when trading in two different time zones.
- A trader must have a trading plan. They should practice in the simulated account prior to trading real money. It is better to start with small amounts to master the skills first.
Risks in Spot Forex Trading:
- Although the high leverage in the Forex market (up to 50:1) provides an excellent opportunity to make money trading small amounts, at the same time, the risk is equally high. It is very critical to deploy the effective risk management and stop loss strategies to avoid large losses.
- The movements in a currency pair can remain relatively small for a period of time followed by strong movement at a later point. This happens due to change in geo-political and economic factors. The traders need to be cognizant of what’s happening in the global economy to avoid big losses from such volatility.
- As discussed in another section, identifying the Stop Loss and the Position Size upfront is key to managing the risk and avoiding large losses.
- The various time zones bring another type of risk: Settlement Risk. Although the markets are open for 24 hours, orders are credited in a specific order. For example, AUD and NZD will be credited prior to USD and CAD. This can bring in relatively bigger transaction risk.
- Although the margin requirements in Forex trading is low (due to high leverage), the sudden volatility in the market may result in margin calls. This will result in paying extra money to the broker to bring it up to the new minimum margin.
