One of the most unique features of the forex market is that it is comprised of a global network of financial centers that transact 24 hours a day, closing only on the weekends. As one major forex hub closes, another hub in a different part of the world remains open for business. This increases the liquidity available in currency markets, which adds to its appeal as the largest asset class available to investors.
Big news comes in and then the market starts to spike or plummets rapidly. At this point it may be tempting to jump on the easy-money train, however, doing so without a disciplined trading plan behind you can be just as damaging as gambling before the news comes out. This is because illiquidity and sharp price movements mean a trade can quickly translate into significant losses as large swings take place or ‘whipsaw’.
By contrast, if you just traded 20 EUR, a loss would not significantly affect your account balance. It would provide you with the opportunity to learn from your experience and plan your next trade more effectively. With this in mind, limiting the capital you are prepared to risk to 5% of your account balance (or lower) will put you in a better position to continue trading Forex (and improving your technique) over the long term.
When you're making trades in the forex market, you're basically buying or selling the currency of a particular country. But there's no physical exchange of money from one hand to another. That's contrary to what happens at a foreign exchange kiosk—think of a tourist visiting Times Square in New York City from Japan. He may be converting his (physical) yen to actual U.S. dollar cash (and may be charged a commission fee to do so) so he can spend his money while he's traveling.
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses as other traders would. There is also no convincing evidence that they actually make a profit from trading.
More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.
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