How it works exactly forex trading today? There are some indications about the foreign exchange markets should take note. One is margin trading, which involves investing a small amount of the deposit. These small numbers is not trivial, and can also influence the market. For example, the trader who wants to swap the currency and put a small security deposit. This deposit is a small graphic that represents 1 percent. It may seem negligible, but certainly not at this trade involving the amount of money, for example million.
Secondary and exotic currencies
Most Forex transactions involve the U.S. dollar because it is more stable and cost effective compared to other currencies. However, it may also invest in secondary currencies, notably the Czech Crown, the Saudi Riyal or in exotic currencies, emerging market currencies. They allow to make excellent profits, but they also have a high risk of loss.
Types of Forex currency
Forex trading offers three types of currencies:
The base currency is the U.S. Dollar (USD), Euro (EUR), the British Pound (GBP), the Australian Dollar (AUS), Canadian Dollar (CAD) Swiss Franc (CHF) and finally the Yen Japan (JPY). A transaction in a major currency is always about the U.S. Dollar and other currencies such as / USD pair GPB, USD / EUR and USD / JPY. If the U.S. Dollar is not present in a pair, they say it is a cross currency pairs such as EUR / GPB, JPY / USD, AUS / CAD, etc.. Transactions on the base currency used to earn small profits, but if the maximum benefit is desired, one must choose the side or exotic currencies.
The secondary currency Forex are New Zealand Dollar , Saudi Riyal , the Danish Crown and the Czech Crown. These types of currency have a low volume of transactions, but they are huge speculation object. Thus , you can win a fortune if we can predict their tendency correctly. But these secondary currencies do not have enough liquidity in the market and therefore , it is sometimes difficult to find a trading platform that offers .
In addition, exotic currencies are based on emerging market currencies such as the Chinese Yuan , the Brazilian real , the Indian rupee and the Mexican Peso . It is estimated that these currencies are more stable than the secondary currency , but they have a very high rate of spread. The spread is defined as the difference in price between two currencies and determines the benefit of the trader.
The advantages and disadvantages of exotic currencies
Exotic currencies have good investment opportunities for traders . However, due to various parameters, these currencies have significant risks .
The benefits of investing in exotic currencies
Emerging countries have strong economic growth . For example , China has a growth rate of about 10 %, which produces a large amount of wealth and money . The result is that the value of the Chinese currency ( Chinese Yuan ) is highly volatile over base currencies . Thus in 2010, the Yuan has increased by 25 % against the U.S. Dollar . This is the reason why exotic currencies can generate big profits. For example, if an investor had bought 50,000 Yuan in early 2010 and that he had sold to the end of the year, he would have realized a net profit of 25 % on each transaction. Forex calls this type of operation a Carry Trade as it is mainly based on massive speculation . Currently , there are three exotic currencies experiencing exponential growth. These three currencies are the Chinese Yuan, the Indian rupee and the Brazilian real . Therefore , traders should choose them priority if they want the Carry Trade .
The downside of exotic currencies
An exotic currency can bring significant gains , but its main drawback is that you can suffer huge losses due to the large fluctuation . Indeed , this type of currency can lose up to 20 % of its value in a few days and this means that the trader could lose its capital. Then all trading platforms do not offer these exotic currencies because their fluctuations. On the other hand , the commission for the transaction can be very high, which is not accessible to all investors. Finally , political and economic instability that may exist in these countries is not favorable for investments in the long .
Invest in a secondary or exotic currency
The trader should have enough experience to invest in a secondary or exotic currency. It is not recommended for novices to perform this type of transaction because the risks of loss are very important. This can be explained by the fact that the secondary and exotic currencies are very volatile and their value can rise or fall dramatically.