Foreign exchange trading - differences from securities trading
There are several features that distinguish foreign exchange trading from securities trading. For example, there are the basic economic characteristics of the two trading instruments. While a share represents a stake in a particular company, a currency pair basically reflects the strength of two economies.
There is also the fact that currency trading in https://forex-exness.net/downloadexness/ is accessible around the clock. Trading in currency pairs does not take place on an institutional, organised futures exchange and while stock exchanges are subject to opening hours, trading in foreign exchange is always possible at any time of the day or night anywhere in the world.
Other differences include the fact that market participants in foreign exchange trading can profit from both rising and falling prices, whereas in securities trading only rising prices bring profits.
Procedure of a transaction on the foreign exchange market
How exactly does a transaction on the foreign exchange market take place? In order to clarify this, the opening and later closing of a long position in the EUR/USD is mentally broken down into its "individual parts" in this section.
The starting point: Opening long in the EUR/USD
Current exchange rate: 1.2500
Position size: 1.0 lots
A long position in the EUR/USD is realised through three transactions:
- Borrowing in USD
- Exchange of the USD credit into EUR
- Investment of the EUR credit
Speculating on the appreciation of the EUR is equivalent to speculating on the depreciation of the USD. It is intuitively understandable that debts in a weak currency are not a disadvantage if they are matched by assets in a strong currency. Foreign exchange trading is based on this principle.
Therefore, the first step is to take out a loan in USD: Since the position size is EUR 100,000 and the exchange rate is quoted at 1.2500, the loan amounts to USD 125,000. In the second step, this credit amount is exchanged into EUR at the current exchange rate. In practice, both steps are executed within a fraction of a second.
Currency pairs
When trading with foreign exchange, you will find a quotation for each pair, which stands for the current value ratio. If you see the quotation 1.1286 for the currency pair EUR/USD, it means that you have to pay 1.1286 dollars to buy one euro. The largest share of the turnover, which can be up to four trillion US dollars daily, is achieved through direct trading with large currency pairs. These so-called majors include, for example:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
Various factors play a role in the decision to buy or sell a currency in foreign exchange trading. These include political and economic developments to a large extent and for this reason it is important to be familiar with current events in the world and to always be up to date.
Order types on the foreign exchange market
Which order types are available is ultimately decided by the broker and, if applicable, the liquidity network connected to it. In addition to simple market orders, stop orders are also possible with almost all brokers. With a stop buy order, a price above the current price level is defined, and when this is reached, a long position is automatically opened. A stop sell order is a mirror image of a stop buy order. Stop Loss and Trailing Stop can also be used.
