Spread Betting – An Explanation of Its Role in Forex Trading
Forex is one of the largest markets in the world, having daily turnover of more than 3 trillion US dollars. It is also known as the FX market. Forex is actually a trading market where currencies are traded. Unlike the stock market, where the key to success is buying low and selling high, in Forex the value of a currency is determined by forces beyond any human control. The Forex market is an over-the Counter market for the international trading of currencies.
This global marketplace determines foreign exchange rates for all major currencies. It includes all facets of purchasing, selling and trading currencies in current or predicted values. When you buy US dollars, the trader then purchases another quantity of currency from the dealer in the form of a foreign exchange trade (free) which is then converted into the US dollars at the end of the day. So a purchase of one Australian dollar is followed by a sale of another Australian dollar, making a net payment of two Australian dollars. The process continues until the balance of payment is satisfied, thus creating a win-win outcome for both parties.
Forex trading involves leveraging, and this leverage is used to create greater trading liquidity and to make trades using smaller amounts of capital than would otherwise be possible. The leverage in forex trading is measured in terms of currency pairs. For example, if you have ten thousand dollars invested in a particular currency you can create ten million dollar trades, each one resulting in a profit. However, while leverage is a useful tool for Forex traders, it should not be considered the be-all and end-all of successful currency prices. Certain trades may require only a small amount of leverage but these trades should only be attempted in situations where your knowledge of the global marketplace, combined with relevant strategies, will bear significantly fruit.
One reason that Forex leverages are so popular is because they allow investors to reduce their risks of losses by spread trading, meaning that they place trades across multiple currency pairs on the same instrument. Spread trading is a very effective strategy that allows investors to take advantage of lower spreads or better liquidity between currencies. When done correctly, spreads can have a significant impact on the way that the market fluctuates, making it possible to make considerable profits when one currency falls in price while another stays steady. However, while Forex leverages allow investors to take advantage of lower spreads, they should only be used as a strategy on major currency pairs such as the USD/JPY or the GBP/USD, as their effect on other currencies will be limited. Leverage is most often required in cases where the two currencies being traded are widely different from one another.
While Forex trading leverages do allow a Forex trader to make large profits, they also come with a number of risks. One of these risks is the possibility of price manipulation by brokers, which can result in false signals being given. It can also lead to losses because if one currency falls in price but is offset by a different one, this can result in a market reversal, or “froth.” Another risk is associated with foreign currency exchange traders who use leverage to make additional transactions, resulting in the trader receiving a “carry” or high interest rate for the initial transaction. Some Forex brokers may offer reduced carry over rates, but these are not always offered and the trader should check whether the broker offers reduced carryover levels and whether these are consistent with the current margin requirements of the particular Forex broker being used.
Forex leveraged strategies are used in the Foreign Exchange market to help Forex traders reduce the costs of Forex trading. These strategies are used by individuals who either do not have the time or the expertise to execute their own trades on their own behalf, or are unable to do so because of the high risk associated with Forex trading. Leverage can also be obtained through foreign exchange online brokerages or through Forex direct investment fund companies, although these sources of leverage tend to be more targeted and concentrated. In many cases, these online brokerage firms offer specialized tools and instruction for Forex traders and there are many examples of these specialized brokerages such as Forex Specialists or Forex Power Strategy.