Topic: Factors to Know Before Opening a Forex Trading Account
Forex is a faced paced market that offers tremendous opportunities to the traders who invest in the market. The currency market has flexible operation hours and traders can operate from anywhere. The traders can even trade while they are at home or in a café through the use of internet. This decentralised market is like a pot full of gold for traders owing to the advantages it offers. It means you can expect to make a huge profit by trading in the market.
Factors to know before opening forex account
If you are planning to open forex account to start trading, you must wait a little and read the following points to learn more about forex market. This will also help you to trade better.
Leverage is like a credit that brokers provide traders on their marginal account. This allows the traders to acquire a larger position in the market by investing very little capital of their own. The leverage provided by forex brokers is the highest in all markets. The leverage can as low as 10:1 and as high as 400:1. This diverse range of leverages in the forex market is an advantage for the traders as they can earn higher profit by investing less capital in a favourable situation.
If you are wondering how leverage in forex works, let’s break it down. The leverage provided to you by your broker depends on the margin that you maintain in your account. The leverage also depends on the account that you have. For example, if you are a premium account holder, you might get higher leverage.
Mostly, 50:1 is used by traders. If you use 50:1 leverage, you get 50 dollar for every dollar you use. Now, for example, you traded for $100. Then you will get $5000 from your broker to trade in the market. Traders trading in the foreign exchange market have to maintain a very low margin in their accounts in comparison to traders who trade in other markets. It is one of the major benefits of forex market. New traders must practice caution while using leverage. It is seen that traders use leverage without measuring their risk-taking capacity. Leverage can have a negative impact on your trading and cause devastating losses if they are used vaguely and the market moves against your trade. Leverage is a factor you must know better before you trade in the currency market.
Well before you start trading with real money your must practice with demo forex account. A demo account allows you to learn about the features of trading software. This ensures that your money is not lost in the real market due to lack of knowledge about the features. You must make sure you select a reputed dealer to trade with to get the benefits of the demo account.
When you start trading in the forex market, you will come across a term known as carry trade. Carry trade means you can earn higher interest rates on longer currencies than the shorter currency. For example, you are dealing with currency pair-USD/JPY. Suppose the USD pays 2% interest in a year and Yen has an interest of 0% in a year. When you trade this currency pair then you borrow Yen and deposit it in the US dollar. In case of positive carry trade, you will earn profit. If the interest rate of USD falls below 2%, you will lose due to capital loss even in times of positive carry.
If you are going to trade in a forex market, you need to understand a factor called counter trading. Foreign exchange is traded over the counter. Traders have to be prepared to tackle the counter party risk. Since a trader invests a very small amount in comparison to interbank market. Some brokers would take opposite trade side. They will pool the retail orders and hedge it against the inter-bank market.
These are the few factors you must know before you open a forex account. Having knowledge about these factors will help you achieve all your trading goals.