Investing in currency
Investing in currency is not for everyone. Although, if you have funds for initial deposit of $500, analytical mind and time, then you have a good chance to become a professional trader.
Let’s look at the mechanism of online Forex trading and the rules of the game.
Trading on the Forex market is, in fact, speculation on exchange rates. Price fluctuations occur in very short periods of time, within intervals of minutes or even seconds. In order to allow traders to react to price changes immediately, Forex brokers provide access to the interbank currency exchange.
Investing in currency – Participants
There is 3 main types of players in the Forex business:
- Market Makers, including banks, hedge funds, prime brokers and dealing desks. Market makers commit foreign exchange transactions worth billions of dollars a day, affecting the currencies price movements, which justifies the name “market makers”.
- Traders: the purpose of a private trader is to recognize the trend of price movement, and make a deal, whether buying or selling currency in timely manner.
- Foreign brokers: the role of a broker in the foreign exchange is to carry out a transaction made by a trader to the currency market. Brokers profit from spread – difference between the buy and sell price of a currency pair.
Types of Forex Brokers
There are several types of currency transaction, and each has their advantages and disadvantages:
- MM/DD (Market Maker and Dealing Desk) – some brokers have a dealing desk, and provide quotes as close to the market price as possible, acting as a market maker, carrying the risks for the execution of your deal, which does not go on the interbank market.
- Pros: Instant execution, typically with no re-quotes;
- Cons: A broker executes your deal internally, as a result – a conflict of interest
- STP (Straight Through Processing) – meaning partial carrying your transactions onto the interbank market, usually the largest ones and therefore risky for a dealing center.
- Pros: Less conflict of interest and currency rates are more accurate;
- Cons: Slower execution, normally with re-quotes;
- ECN (Electronic Communications Network) – meaning classic brokerage service, where a broker carries any transaction to the interbank market.
- Pros: No conflict of interest, market price quotes, usually no spread;
- Cons: Deal execution is not guaranteed, minimum lot is larger, usually involves commission;
It would seem that the mechanism is clear, initial funds are reserved, you can get started? Stop!
Investing in currency is full of pitfalls and risks, as any money industry. Before starting online Forex trading – choose a broker you are going to trade with. Check the broker’s regulation in the media as well as the information sources and specialized forums. Compare trading conditions, availability and quality of training, a personal account manager and promotions.