What is an important cover transaction for Forex investment in Online Forex Trading: Some people who are investing in Forex have questions such as “How does cover trading affect investment?” “Does Forex companies place 100% of customer’s orders with cover trading partners?” Some people may be.
This time I will explain the important cover trading in Forex investment. Besides, we will also introduce recommended Forex companies, so please refer to them to deepen your understanding of the mechanism of cover trading.
What is an important cover transaction in Online Forex Trading
Forex companies are profiting from commissions such as account opening fees and spreads. However, recently, many Forex companies are keeping transaction fees low. Therefore, each Forex company controls sales by conducting “cover trading”.
Cover trading also affects the profits of Forex investors. Therefore, when you start Forex, make sure you understand cover trading as well.
Cover trading mechanism
Cover trading is also known as a “cover deal”. It means that the Forex company makes a transaction with a bank or a securities company in the same currency as the customer did.
For example, a customer orders 100,000 currencies long at an exchange rate of 100 INR to the dollar. Then, the Forex company orders a long of 100,000 currencies, which is the same as the customer’s order, from the bank or securities company.
Forex companies can prevent loss of the company by conducting cover transactions for all orders from customers.
What happens if you don’t make a cover transaction
What happens if the Forex company does not make a cover transaction? If you do not make a cover transaction, the Forex company may suffer a loss.
In most Forex companies in the country, the Forex company and the investor have a relative relationship. If an investor makes a profit on Forex, it will be a loss for the Forex company. On the contrary, when the investor makes a loss, it will be profitable for the Forex company.
For example, an investor orders a long position in USD INR. If the exchange rate moves to a stronger yen and becomes a loss cut, the loss due to the loss cut is the profit of the Forex company. However, if the exchange rate moves to the depreciation of the yen and the profit are confirmed, the Forex company will have to pay the profit to the investor.
If many investors make a profit, the Forex company may go bankrupt because it has to pay all the investors. In other words, forex companies can prevent losses by placing the same orders placed by customers on banks and trading companies.
Why it is important to check the cover customers of Forex companies
When you start investing in Forex, weigh multiple Forex companies and select the Forex company you use. There are factors such as wide spreads and a large number of currency pairs, but it is also a good idea to check the cover customers as well.
There are three reasons why checking cover partners is important:
Execution is difficult unless the cover transaction is completed
The first reason is that it is difficult to execute a contract unless a cover transaction is completed. In Forex investment, select the currency pair you want to buy or sell before placing an order. However, if the order is not filled, it does not mean that the transaction has been completed.
When an investor places an order, the Forex company also places the same order with a securities company or a bank. In other words, when a securities company or bank fills an order of a Forex company, an investor’s order can be filled. Forex companies whose cover customers are highly reliable securities companies and banks can be said to have high contract power.
The actual rate and the rate offered by the Forex company are different
The second reason is that the rate of the Forex company is based on the interbank market (interbank market), so the actual rate and the rate offered by the Forex company are different.
For example, if the rate of the interbank transaction market is 100 INR per dollar and the securities company or bank offers it at 100.10 INR per dollar, the FX company will be 100.10 INR per dollar like the securities company or bank. We have adopted a rate. Therefore, there is a deviation from the actual rate.
The rates offered will vary depending on each bank and securities company. For example, Bank A may offer 100.10 INR, while B Securities Company offers 100.12 INR. Forex companies that have multiple cover trading partners will use the one with the best rate among the rates offered by banks and securities companies.
The cover business partners that are affiliated with each Forex company differ. Some Forex companies have only one cover trading partner, while others have five or more cover trading partners. It can be said that a Forex company with multiple cover accounts has a more stable rate than a Forex company with only one cover account.
Coverage rate varies depending on each Forex company
The third reason is that each Forex company has a different coverage rate.
The coverage rate is the rate at which orders are sent to cover customers. The coverage rate varies depending on the Forex company, and some Forex companies actively cover it, while others do not cover most of the transactions.
When long and short orders are placed by multiple customers at the same time, the customers can cancel each other out. However, forex companies with high coverage are generally more likely to be reliable.
- FX companies can manage stably by cover trading
- FX companies use the offer rate to cover business partners
- Coverage rate differs depending on each FX company
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