Tag: Forex Basics

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Forex Assets

Understanding The EUR/JPY Asset Class

Introduction

Introduction

Introduction

The Euro area’s euro against the Japanese yen, in short, is termed as EURJPY. This pair, too, like the EURCHF, EURNZD, EURCAD, EURGBP, etc. is a minor or cross currency pair. It is one of the most traded currency pairs in the forex market. Here, the EUR is the base currency, and JPY is the quote currency. The value of this pair is quoted in terms of the quote currency.

Understanding EUR/JPY

This currency pair is precisely quoted as 1 EUR per X JPY. In simple terms, the value determines the units of the quote currency (JPY) required to buy one unit of the base currency (EUR). For example, if the market value of EURJPY is 121.00, it basically means that these many yen are required to purchase one euro.

EUR/JPY Specification

Spread

Spread is the difference between the bid price and the ask price set by the broker. This value is not constant and varies from broker to broker. It also varies on the type of account model.

Spread on ECN model: 0.6

Spread on STP model: 1.5

Fees

Spread is not the only way through which brokers generate their revenue. They charge some fee (commission) on each trade as well. Fees again vary from broker to broker and account model. Typically, there is no fee on an STP account. However, there are a few pips or fees on an ECN account as their spread is lesser than an STP account.

Slippage

Slippage is the difference between the trader’s asked price and the actual price given to him. Two factors majorly affect slippage on a trade; one, the volatility of the market, and two, broker’s execution speed. The slippage is usually within 0.5 to 5 pips. For major currencies, the slippage is much lower.

Trading Range in EUR/JPY

The trading range is the illustration of the minimum, average, and the maximum number of the pips the currency pair has moved in a given time frame. These values help assess the profit/loss potential of a trade. For instance, if the max volatility on the 1H is 10 pips, then one can expect to win or lose a maximum of $92 (10 pip x 9.20 value per pip) in an hour or two.

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can determine an extensive period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/JPY Cost as a Percent of the Trading Range

In addition to assessing the profit/loss in a timeframe ahead of time, we can use these values in determining the cost variation in different timeframes and volatility as well. The cost as a percent of the trading range tells the min, average, max costs by considering the timeframes and volatility as its variables.

ECN Model Account 

Spread = 0.6 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.6 + 1 = 3.6

STP Model Account

Spread = 1.5 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.5 + 0 = 3.5

The Ideal way to trade the EUR/JPY

Above are the costs of each trade in terms of percentages. Note that they do not represent the actual cost on trade in terms of dollars, but are magnitude values which can be used for comparing with other values. The higher the magnitude of the percentage, the higher is the cost on the trade for that particular timeframe and volatility. From the tables, it can be ascertained that the values are highest on the min column and lowest on the max column. This, in turn, implies that the costs are higher when the volatility is low and vice versa. Talking about the timeframe, the costs are high on the lower timeframes and low on the higher timeframes. So, a day trader may preferably trade on the 2H/4H when the volatility is around the average values. And long-term traders may trade the 1W/1M whatsoever be the volatility of the market.

Furthermore, a trader may reduce their costs by entering and exiting trades using limit order instead of market orders. This will completely erase the slippage on the trade. An example of the same is given below.

Total cost = Spread + trading fee = 0.6 +1 = 1.6

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Forex Course

42. How to stay away from the Forex Bucket Shops

Introduction

Introduction

Introduction

With a significant increase in the demand for retail traders to trade in the Forex market, tons of forex brokers have established their businesses to profit from their clients. This might seem like an advantage for traders as they have a variety of options to choose a broker. However, this is not the case.

In the world of forex brokers, there exist both genuine and fraudulent brokers. And these fraudulent brokers are referred to as bucket shops. These brokers have a frequent practice of misquoting and requoting and slippage, which favors only them.

Back in the day, as there was no internet, it was not possible for traders to know the actual price of the currency or security every moment. So, the clients used to place trades via phone. But, there were brokers who used to put the clients’ phone orders on slips and drop them into a bucket instead of officially executing them. Later, these orders were unofficially executed against the bucket shop operates, known as bucketeers.

These bucketeers usually did not disclose the real price of the currency, which was being traded in the market. They used to tell their clients that the price didn’t move in their favor, even if it actually did. But with the introduction of the internet and the improvement in the regulation of forex brokers, these scams have considerably reduced.

However, unfortunately, there still are these brokers out in the market. So, we’re here help to protect you from these scams. Things one must always keep a track of when trading with a broker are as follows:

✨ Constantly compare the price movement

Many traders trade based only on the prices mentioned by the brokers on their trading platform, which is quite dangerous. Currently, on the internet, there are many web portals that show the price feeds every tick. Hence, one must always keep track of the price feeds from several third-parties to confirm if the prices shown by the broker are real or not.

✨ Have a Trading Journal

Developing the habit of keeping a detailed journal of all the trades and transactions is extremely vital for a professional trader. Because if a trader feels that the broker has cheated them, they will need evidence to prove the genuineness in the filed case. And the simplest way to keep track of it is by taking a screenshot of every transaction they make. This can act as an excellent backup when they are cheated by a broker.

✨ Filing a legal action

Sometimes the disputes between the clients and brokers are not settled completely. So, this is when a trader must take legal action. If any conflict is unsettled, Forex traders can approach either the Commodity Futures Trading Commission (CFTC) or the National Futures Associations (NFA).

The CFTC has something called Reparation programs that provide an unbiased forum to handle and resolve customer’s complaints. You can click here to access the program.

Hence, by considering all these factors, one can stay away from being trapped by the fraudulent brokers in the industry.

[wp_quiz id=”56298″]
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Forex Assets

What Should You Know About EUR/GBP Forex Pair Before Trading

Introduction

Introduction

Introduction

EURGBP is the abbreviation for the currency pair Euro area’s euro against the Great Britain pound. This pair, unlike the EURUSD, USDCAD, GBPUSD, USDCHF, etc. is not a major currency pair. This pair is classified under the minor currency pairs and the cross-currency pairs. In EURGBP, EUR is the base currency, and GBP is the quote currency.

Understanding EUR/GBP

The current market price of EURGBP depicts the required number of pounds to purchase one euro. For example, if the value of EURGBP is 0.8527, then one needs to pay 0.8527 pounds to buy one euro.

EUR/GBP Specification

Spread

Spread in trading is the difference between the bid price and the ask price. The spread is not the same on all brokers but depends on the type of account. It also varies depending on the volatility of the market. An average spread on an ECN account and an STP account is shown below.

Spread on ECN: 0.8 | Spread on STP: 1.5

Fees

On trade a trader takes, there is some fee associated with it. Fees, again, depends on the type of account. There is no fee on STP accounts, but few pips on ECN accounts.

Slippage

When a trader executes a using the market order, they don’t really get the price they had intended. There is a small pip difference between the two prices. And this difference between the prices is referred to as slippage. The slippage is usually within 0.5 to 5 pips.

Trading Range in EUR/GBP

Understanding the volatility of the market is essential before opening or closing a position. It shows how much profit or loss a trader will be on a particular timeframe. For example, if the volatility is on the 4H is 10 pips, the trader can expect to gain or lose $1269 (10 pips x 12.69 value per pip) in a matter of about 4 hours.

The table below illustrates the minimum, average, and maximum pip movement on the 1H, 2H, 4H, 1D, 1W, and 1M timeframe.

EUR/GBP PIP RANGES

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

EUR/GBP Cost as a Percent of the Trading Range

An application of the volatility would be the determining of cost on each trade. As in, the ratio between the volatility and the total cost on each trade is calculated and is expressed in terms of percentage. The percentage depicts the cost for a particular timeframe and volatility. The comprehension of it shall be discussed in the subsequent section.

ECN Model Account

Spread = 0.8 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.8 + 1 = 3.8

STP Model Account

Spread = 1.5 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.5 + 0 = 3.5

The ideal way to trade the EUR/GBP

With the above two tables, let us figure out the ideal way to trade this currency pair. Note that the higher the percentage, the higher is the cost on a trade and vice versa. It is evident from the chart that the percentages are highest for the minimum column and lowest for the max column. In other words, the cost is high when the volatility of the market is low, and the cost is low when the volatility is high. So does this mean it is ideal to trade when the volatility is high? Well, that’s not the right approach to it, as trading in high volatility is risky. So, it is ideal to take trades during those times when the volatility is around the average range. Doing that will ensure marginal cost as well as decent cost. For example, a 4H trader must take trades during those occasions when the volatility is around 20 pips.

Note: One can apply the ATR indicator to determine the current volatility of the market.

Another feasible way to reduce costs is by canceling out the slippage cost. Cancel slippage costs can simply be done by placing limit orders. With limit orders, the slippage automatically becomes 0.

The difference in the cost percentage when the slippage goes to zero is illustrated as follows.

We hope you find this Asset Analytics informative. Let us know if you have any questions in the comments below. Cheers!

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Forex Course

21. Who Are The Forex Market Movers?

Introduction
In the previous lesson, we discussed how the forex market is structured. Now, it is time to take this topic a little deeper. In this article, let’s understand the

Introduction
In the previous lesson, we discussed how the forex market is structured. Now, it is time to take this topic a little deeper. In this article, let’s understand the

Introduction

In the previous lesson, we discussed how the forex market is structured. Now, it is time to take this topic a little deeper. In this article, let’s understand the Forex market movers. The participants of the market during the late 20th century were quite less. But, as time passed by, the number of participants grew exponentially. The big players got bigger, and the small retail traders found their way into the market. And at present, the forex market is no less than an ocean.

The participants of the Forex market

The Forex is approximately a $5 trillion market. This kind of liquidity comes from several types of traders. Some of them come with large pockets, some with medium-sized capital and the rest to make a quick buck. Now, let’s get an insight into all of these participants.

Central Banks

Central Banks play a crucial role in the Forex market. The interest rate policies of the Central Banks influence the exchange rates to a large extent. They are also responsible for Forex fixing. They take action in the Forex market to stabilize and pump in the competitiveness of that country’s economy. Moreover, they participate in the currency exchange to manage the country’s foreign exchange reserves.

Commercial Banks

Many assume that commercial banks come under the central banks’ category. However, this isn’t true. The commercial banks are the most active participants in the FX market. They’ve got the biggest pockets out there and trade with considerably large quantities of lots. Due to this, they partially determine the exchange rates of the currencies as well. About 100 to 200 banks around the world assumed to ‘make’ the market. The commercial banks facilitate the services to the retail clients for conducting foreign commerce and making an international investment. The commercial banks include large, medium, and small-sized banks, and as a whole, these banks are referred to as the interbank market.

Foreign Exchange Brokers

Forex brokers also have their significance in the market. They are agents who facilitate trading between two parties. Note that these brokers are just matchmakers and are not really involved in determining the exchange rates of currencies. Brokers constantly keep an eye on the exchange rates and try matching the price of buyers and sellers to execute a trade.

Multi-National Companies

The MNCs are major participants in the FX markets, who do not come from the banking side. These companies usually participate in the forward or the futures markets. Their participation comes from the cash flow between different countries. MNCs typically set up contracts to pay or receive a fixed amount of foreign currency in the future date.

Retailers

The exponentially growing market in the Forex is the retail market. The retailers include smaller speculators and investors. Speculators, unlike the participants mentioned above, are not in genuine need of foreign currencies. Their motive from the market is simple. They buy or sell with a hope that the price will move in their favor and can end up with a profit. They get their orders placed by brokers who act as an intermediary between buyers and sellers. The power of retailers to move the market is minimal because their contribution to the volume traded in Forex is less than 6% of the total Forex volume.

These are the different participants who make up the entire Forex market. In the upcoming lesson, we shall open up more about the Forex brokers. Don’t forget to take the below quiz to check your learnings.

[wp_quiz id=”48275″]
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Forex Course

16. Trading The London Session

Introduction 
The London session, also referred to as the European session, is the session where a significantly high amount of trading happens. The London session opens at 3:00 AM

Introduction 
The London session, also referred to as the European session, is the session where a significantly high amount of trading happens. The London session opens at 3:00 AM

Introduction 

The London session, also referred to as the European session, is the session where a significantly high amount of trading happens. The London session opens at 3:00 AM EST and is rigorously traded for eight hours straight.

There are several big financial institutions in Europe. So, the trading volume in the FX market during this session is extremely high. Due to this, many retail traders also show massive participation during this session. Hence, the London session was named the forex capital of the world.

There are thousands of transactions every minute during this session. As per sources, 30% of all forex transactions are executed during the European session.

In the previous lesson, we saw the average pip movement in the Tokyo session for some majorly traded currencies. The average there came to around 53. Now, coming to the London session, the average is much higher than the Tokyo session. The number stands at 72. During this session, the FX majors, as well as minors, tend to move by large amounts.

The below table gives you an idea of the average pip movement for some intensively traded currencies.

More about the London Session

As mentioned, London is considered as the Forex capital of the world. The majority of the volume in the market comes during the London session. Hence, there is high liquidity during this session.

The London session opens during the closing time of the Asian market. During the Asian session, the market usually goes through a consolidation phase. But, when London opens its shops, the consolidation comes to an end, and the market begins to move in a trend state. However, during the middle of this session, the market slows down and begins to consolidate. This could perhaps be due to the fact that the traders are waiting for the New York market to open. It has also been observed that the market reverses its direction at the end of the session. This could mean that the large players are booking their profits.

As far as trading in this lesson is concerned, this is the ideal session for the trend traders. A trend trader can analyze the markets during the Asian session and gear up to take trades when the London market opens.

The best currencies to trade during the London session

It is clear from the table that we can trade any pair in the market. There is sufficient liquidity in most of the currency pairs. Specifically speaking, one can keep a close eye on pairs such as EURUSD, GBPUSD, USDCHF, USDCHF, GBPJPY, EURJPY, etc. Moreover, as there is a heavy volume of trading in these pairs, the spreads here are very tight.

Thus, this brings us to the end of this lesson. In the next lesson, we shall discuss the New York session. For now, test your learning by taking up the quiz below.

[wp_quiz id=”46939″]
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Forex Course

14.The Different Sessions In The Forex Market

Introduction
The forex market is traded all across the world. In fact, it is open 24 hours. And these markets are traded in countries when their national markets are

Introduction
The forex market is traded all across the world. In fact, it is open 24 hours. And these markets are traded in countries when their national markets are

Introduction

The forex market is traded all across the world. In fact, it is open 24 hours. And these markets are traded in countries when their national markets are open. There are about four major countries where vast lumps of cash flow in and out of the forex market and thereby keeping it very liquid and volatile. To trade professionally, having an idea of the different markets open and close is vital. Hence, in this lesson, we shall be going over the various sessions in the forex market.

Forex market trading sessions

Though all countries trade in the forex market, there are a few countries where the massive volume of trading takes place. The 24 hours trading in the forex market is divided into four sessions. These four sessions are given as follows:

• The Sydney Session 

• The Tokyo Session

• The London Session

• The New York Session

Moreover, the open and close of these sessions vary based on the season as well. One session falls between March/April to October/November, and the other starts from October/November and goes up to March/April. The former is the spring/summer session, and the latter is the Fall/Winter session.

Trade timings during Spring/Summer (in the US)

Trade timings during the Fall/Winter (in the US)

Note that the time represented is the local time (US) and the EST, and is different from every country’s standard time. However, the standard market timings for most countries lie within 7:00 AM and 6:00 PM.

Furthermore, there is an overlap between sessions. That is, during the overlap, the Forex market is traded by two regions simultaneously. For example,

The New York and the London session has an overlap between 8:00 AM – 12:00 PM EST

The Sydney and the Tokyo session overlaps between 7:00 AM and 2:00 AM

And the London and the Tokyo session overlaps between 3:00 AM to 4:00 AM.

These overlapping sessions are essential for traders because at that time is when more liquidity and volatility are created in currency pairs. This is so because traders from two markets operate simultaneously.

Hence, this completes the lesson on the different sessions in the forex market. And in further lessons, we shall discuss each one of the sessions in detail. For now, test your learning of this lesson by taking up the quiz below.

[wp_quiz id=”46553″]
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Forex Market

The Basics of Spread & Slippage

Spread
Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a

Spread
Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a

Spread

Did you know that each time you place a trade, you pay a fee to the broker for providing the opportunity & platform to trade? Spreads act as a fee on zero-commission accounts (STP accounts). A spread is simply the price difference between the purchase price and selling price of an asset. The broker always shows two quotes of currency – one at which they sell the underlying asset to you and another at which they buy the underlying asset from you. The spread between these two prices makes the broker’s revenue from the foreign exchange transactions they perform for their clients.

Bid-Ask spread

There are two types of forex rates, the Bid and the Ask.

The price you pay to buy the forex pair is called Ask. It is always slightly higher than the market price.

The price at which you sell the forex pair is called Bid. It is always slightly lower than the market price.

The price that you see on the chart is always a Bid price. The ‘Ask’ price is always higher than the ‘Bid’ price by a few pips. Spread is essentially the difference between these two rates.

Spread = Ask – Bid

For example, when you see EUR/USD rates quoted as 1.1290/1.1291, you buy the pair at the highest Ask price of 1.1291 and sell it lower Bid price of 1.1290. This particular quote shows a spread of 1 pip.

Types of spreads

The kinds of spread depend on the rules of the broker. Spreads can either be fixed or floating.

Fixed spreads remain fixed no matter what the market conditions are at any given point of time. The advantage of this type of spread is that the broker will not be able to widen the spreads during volatility.

Floating, also known as variable spreads, are continually changing. They widen or tighten depending on the supply and demand of currencies and market volatility.

Slippage

Slippage is a phenomenon in the forex market where currency prices change while an order is being placed, thus causing traders to enter or exit trades at prices higher or lower than they desire. Slippage happens because of the imbalance of buyers, sellers, and trade volumes. It also occurs when the market is less active with lower liquidity.

For instance, a trader wants to buy a currency pair at $1.0015 (Current Market Price) with a broker of his choice. Once he submits the buy order, the best-offered price suddenly changes to $1.0020. It is considered as a negative slippage of 5 pips. In the same example, if the best-offered buy price suddenly changes to $1.0005, it is regarded as a positive slippage of 10 pips.

How to avoid slippage?

Slippage cannot be entirely avoided if you trade using market orders, but it can be reduced. One way a trader can minimize slippage is to ensure that their broker has many liquidity providers. Another way is to avoid trading during periods of high volatility as prices move faster and at wider intervals. To check volatility, traders can make use of technical indicators such as Bollinger bands or Average True Range.

The only way to entirely avoid slippage is by using strategies that employ limit orders on entries and exits.

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Forex Market

What Is Pip & Why Should You Know About It?

What is a pip?
Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that

What is a pip?
Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that

What is a pip?

Essentially, a pip represents the price interest point. It is known to be the smallest numerical price move in the forex market. As you know that most currencies are priced to 4 decimal places, obviously, any change in price would start from the last decimal point. For example, in the price quote, $1.0002, ‘2’ indicates the pip value. A pipette means the 5th decimal place, while pip is the 4th decimal place.

For most pairs (except JPY), it is equivalent to 0.01% or 1/100th of one percent. In the forex market, this is referred to as Basis Point (BPS). One BPS is equal to 0.01% and denotes the percentage change in the exchange rate.

Calculation of move

Now that you know what pip means, let us see how it changes the profit and loss in your trading account. Large positions will have greater monetary consequences in your balance. The formula for calculating the value of the position is:

Position size x 0.0001 = Monetary value of pip

Let us use the above formula and apply it in some real pairs. If you open a position of 1000 units, the pip value can be calculated as 1000 (units) x 0.0001 (one pip) = $0.1 per pip.

When you open buy positions and market reacts in your favor, for every pip movement, you will earn $0.1, and the same is the case for a sell position. If the market moves against you after you buy or sell, $0.1 will be lost per pip movement as the trend continues in the opposite direction. Increasing or decreasing the number of positions will have the exact effect on the pip value.

Different currencies and their pip value

Pip value varies per currency as they are dependent on how it is traded. It also depends on the trading platform and the price feed. It is important to know that there are brokers who show four digits as pip, and some show five. One of the most important points you need to know is the average daily trading range, in order to gauge volatility in the market.

Average daily pip movement of major currency pairs

Conclusion

To conclude, pips are the smallest increment by which a currency pair can change in value and represents the fourth decimal of a currency pair other than the Japanese yen. In the case of Japanese yen, the pip is located at the second decimal place. Proper knowledge of pips will help you determine your stop loss size, as it is a major part of any strategy. One should never underestimate the simplicity of pip. Now that you have learned what a pip means, you can proceed to more trading concepts. Cheers!

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Forex Course

10. Understanding Lots & Different Types Involved

Introduction
In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are

Introduction
In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are

Introduction

In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are combines into different tradable sizes, and they are called as ‘Lots.’ Hence, to buy and sell currency pairs, you must trade in the form of lots. There are different lot sizes depending on the number of units you trade. For example, 10,000 units are referred to as a mini lot and 100,000 units as a standard lot. Now, in this lesson, we shall understand other lot sizes along with some examples.

What is a lot in Forex?

A lot in Forex is the number of units of a currency pair. Note that one unit is not equal to one lot. Instead, a collection of units of a currency pairs make a lot. And depending on the number of units that are involved in making up a lot, there are different lot sizes in the market.

Different Types of Lots in Forex

Depending on the number of units, we can classify Lots in four types.

Standard Lot

The size of this lot is 1 and is made up of 1000,000 units of a currency pair. So, buying 100,000 units of EURUSD is as good as saying you have bought 1 lot of EURUSD.

Mini Lot

In terms of lot size, the quantity of ‘lots’ in a mini lot is 0.1. And one mini lot consists of 10,000 units of a currency pair.

Micro Lot

The quantity of lots in a micro lot is 0.01. And this lot is made up of 1,000 units. So, buying is 1 micro lot means, buying 0.01 lots or 1,000 units.

Nano Lot

0.001 lots make up one nano lot, and it consists of 100 units of a currency pair.

Now, let us take some examples and clear out the differences in these types.

Examples

E.g., 1: Buying 5 standard lots.

Lot size distribution = 5 * 1 standard lot

Number of units = 5 * 100,000 = 500,000 units

E.g., 2: Selling 1.5 standard lots

Lot size distribution = 1 * 1 standard lot + 5 * mini lots

Number of units = 1.5 * 100,000 = 150,000

E.g., 3: Buying 3.2 mini lots

Lot size distribution = 3 mini lots + 2 micro lots

Number of units = 3.2 * 10,000 = 32,000

Leverage trading

You must have seen brokers who let traders trade with as low as $100. In fact, they let you trade mini lots with it. Now, you must be wondering how one can trade 10,000 units with just $100 in their account. Well, this is facilitated by the brokers as they offer to trade with ‘leverage.’

In leverage trading, brokers let you take positions larger than the capital you possess. And as far as the mechanism of this is concerned, a broker lends you with the required money to take a position. And for this, they keep some amount of your capital as deposits. This deposit stays with them until your trade is open. When the trade is closed, the complete deposit is returned back to you. Leverage, also referred to as margin, is usually measured in ratios or in percentages. A detailed explanation of this shall be discussed in further lessons.

Hence, this completes the lesson on Forex lots and its types. And below is a quiz to help you check if you have grasped the concept better.

[wp_quiz id=”45130″]
Categories
Forex Assets

An Overview of the Commodity Markets

Introduction
Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are

Introduction
Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are

Introduction

Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are further divided into soft commodities and hard commodities. Hard commodities are natural resources that are mined or extracted, such as gold, silver, and oil. Soft commodities are agricultural products or livestock such as corn, coffee, sugar, and wheat.

Traders can invest in commodities in multiple ways. The most popular method of investing in commodities is by buying a futures contract. You also can purchase commodities through ETFs. Some of the U.S. commodity exchanges are the Chicago Mercantile Exchange, Chicago Board of trade, New York Board of Trade and New York Mercantile Exchange.

Different categories of commodities

Agricultural commodity trading

The commodities that fall under this category are sugar, coffee, cocoa, cotton, corn, and wheat. Many assume that agricultural markets are not thickly traded, but that’s a myth. In fact, coffee is the second largest commodity in the world, after oil.

The factors which impact the price of agricultural commodities are supply/demand, weather, trade agreements with other nations, new technology, taxation, etc. There are regulatory bodies that decide how a particular commodity should be produced and sold.

Energy commodity trading

This is an extremely popular category of commodities that includes Brent crude oil, WTI crude oil, gasoline, and others. The reason why these commodities are important is that they are an integral part of numerous industries. They have the power to move an entire economy. For example, an increase in oil prices will affect aviation companies, paint industries, tire companies and many more.

Countries like Russia and Saudi Arabia heavily depend on oil for revenues. Factors such as supply and demand play a major role in determining oil prices. Some other factors (which are specific to oil) include OPEC (Organization of the Petroleum Exporting Countries) meeting outcome, political statements, International agreements, etc.

Metal commodity trading

This category includes precious metals like Gold, Silver, Platinum, and Palladium. Earlier trading in precious metals was only possible by rich investors, but now with the introduction of CFD trading, traders can easily invest in metals along with wide leverage options. Supply and demand once again affect the prices of gold and other metals. Other factors include economic changes in China and India (as they are the world’s largest consumers), taxation, and Federal reserves’ interest changes.

Commodities on Forex Brokers 

Despite the fact that Forex is primarily a market for trading a variety of currencies, most Forex brokers offer a wide range of other various trading assets to their customers. By doing this, these brokers are helping their customers in diversifying their investments.

Currency trading brokers allow trading precious metals such as gold, silver, and platinum. Traders can also invest in energy commodities that include crude oil and natural gas. Forex brokers that provide commodity derivatives and CFDs are getting more and more popular and in-demand than the brokers who deal with only currencies and nothing beyond.

Guidelines to Commodity Trading

Novice traders should look at broad trends while investing and trading individual commodities. They could look at levels of crops being produced, metals being mined, and the oil extracted. Because these factors can give them clues about the direction of the market. Similar to this, inventory levels can also be a great tool for analyzing commodity markets. Continuous drawdown in inventory levels can lead to higher prices, while inventory buildup can lead to lower prices.

Technical analysis is another widely used method to trade commodities. This type of analysis uses historical prices and trends to predict the future. True technical traders do not pay any attention to fundamental factors but just price-action. But, our recommendation is to look at both fundamental factors and technical analysis in order to get the best trading results while dealing with commodities.

We hope you had a good read. If you have any questions, let us know in the comments below. Cheers!