| Some things you should be aware of |
I have started learning about trading on the Forex market and this series of articles are intended pointers that I think are important for other newbies. Ideally you should also have a demo account that you are trying out which will this stuff much easier to understand. In this article Im going to go through the basic FX terms and jargon but you can find a full glossary here
The bid ask spread
You may notice in your account that for each currency pair there are two prices quoted, the bid price and the ask price. The bid price is the price that the broker will buy the currency for i.e. the price you will sell for and the ask price is the price that the broker will sell for i.e. the price you buy at. The difference between the two is called the spread and is how the broker makes their money.
Trades can be made when the market is going up or down.
Typically in business, you make a profit by buying something at low price and then selling it at a higher price. On the FX market, since trades are done in pairs of a buy and a sell (also known as round turn lots) it doesn’t matter which way round the trades are done so you can sell something before you buy it. So if you think the price of a particular currency is going to go down, you can sell it at the current higher price then buy it later on when the price is lower. Thus you have completed the basic “buy low, sell high” strategy.
What is a lot
A lot is simply the minimum amount that the broker allows you to trade. This is usually $10,000 or $100,000
Rollover
Rollover is essentially the interest that you earn or pay on the currency you are holding or owe at the moment. For example if you have bought Euros with GBP then you will earn the interest the banks pay on the Euro. Also since you have used borrowed GBP to make purchase, you will have to pay interest on the GBP. Since you earn 1.25% on the euro and you pay 0.5% on the GBP you end up earning the difference 0.75%. If the difference in interest rates is positive as in the previous example then you will end up with a profit, if it is negative then you will have ended up paying the rate. Many successful traders use this strategy, called carry trading, to make a lot of money.
Rollover is paid at the end of each day at your brokers cut off time (usually 5pm) on any open positions. |