The world of currency trading differs considerably from trading of other financial instruments and commodities. Forex trading is considerably different from stock, bonds and futures trading. Knowing the basics of this market is very important for a trader to profit from the market.
The Biggest Financial Market: The daily trading volume of the currency market exceeds 4 trillion US dollars and by far it is the largest financial market exists in the known universe. The major players of the market are banks including central banks. They carry out most of the big transactions of the market. The retail traders contribute a small part of the market, but the contribution is increasing swiftly over the years because of the increasing popularity of forex trading.
Round the Clock Trading in Sessions: The world currency trading market is open 24 hours a day from Sunday evening to Friday evening GMT. But the transaction volume in intraday trades show great variations as there are three major trading sessions as Asian session, European session and North American or US session. There is an overlapping of Asian and European sessions and also European and US sessions where the trading volumes can be very high. And, there is a considerable gap between US session close and the start of Asian session where the trading volumes can be very low. The currencies of countries from the particular region are most traded when the regional session is open.
Over-The-Counter Trading and Currency Pairs: Currencies are traded in pairs. One can buy a currency by selling another. The price relation between the two currencies is the exchange rate or the price of the pair and is priced up to the fourth decimal point. The smallest price change possible to a pair is known as pip and it generally equals 1/100 of 1% of the exchange rate. The trades are executed over-the-counter meaning directly between the buyer and seller; and there are no centralized exchanges or regulatory bodies for forex trading.
The Three Types of Lots and their effects on trading: Forex trades are carried out in lots. Now there are three types of lots available to retail traders as standard lot, mini lot and micro lot. A standard lot is the position size that equals $100000, a mini lot equals $10000 and a micro lot equals $1000. When trading with standard lots, a pip difference in price can cause $10 profit or loss. Similarly with mini lots the same can cause $1 change and with micro lots a 10 cent ($0.10) change. Also it should be noted that the availability of the types of lots varies with broker as most brokers only offer standard and mini accounts.
The Most Popular Currencies: Although there are hundreds of currency pairs available for trading, a majority of volume is contributed by only 18 currency pairs made up of eight most popular currencies. These currencies include USD (US Dollar), EUR (Euro), GBP (British Pound), JPY (Japanese Yen), CHF (Swiss Franc), CAD (Canadian Dollar), NZD (New Zealand Dollar) and AUD (Australian Dollar). Retails traders also prefer these currencies as they are most liquid.
