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Settlement in the market

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What is settlement?

The term "settlement" can have several meanings, and in the world of trading refers to a position closing by the opening of a new transaction that offsets the former.

For example, if you have a purchase transaction in the Forex currency pair EUR/USD worth of 1 standard lot (100000 units), this operation would be settled by opening a sell order in the EUR/USD worth of 1 standard lot. The price at which this is done is the settlement price.

What is the settlement price?

The settlement price is the actual price price given to a asset. This price is determined between the bid price and the ask price given between buyers and sellers interested in trading the asset.

In any trade process or buy/sale transaction, the sellers prefer to sell at the highest price possible while the investor or the party interested in purchasing the same asset want the lowest possible price. Somewhere in between a price that is acceptable to both parties is reached. At this point it is where transactions take place and at that point it is said that the market has settled (cleared market). Therefore, the settlement price (clearing price) of an asset is the price at which occurred the last most recent transaction.

 


 

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