What
is Forex Trading?
What is Forex Trading? How does it work?
Foreign exchange or forex trading involves the trading of the world's many currencies. It is the largest market in the world with trades amounting to more than USD 1.5 trillion every day. Forex Trading takes place directly between the two counterparts necessary to make a trade, either over the telephone or on electronic networks all over the world. The main trading centers for trading are Sydney, Tokyo, London, Frankfurt and New York. The forex market is a 24-hour market.
Forex trading involves the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are – EUR/USD, USD/JPY, USD/CHF and GBP/USD.
Professional investors like funds, banks and brokers dominate the foreign exchange market but any individual investor with the necessary knowledge of the market's functions can participate in forex trading.
Forex trading basics:
• Margin Trading - Foreign exchange is normally traded on margin. A relatively small deposit can control much larger positions in the market. For example, a change of 1% can result in a 100% profit or loss on your deposit.
• Base Currency and Variable Currency – In forex trading, you will always trade a combination of two currencies. For example, you will buy US dollars and sell Euro or buy Euro and sell Japanese yen or any other combination of dozens of widely traded currencies.
• Dealing Spread, but No Commissions - When trading foreign exchange, you are quoted a dealing spread offering you a buying and a selling level for your trade. Once you accept the offered price and receive confirmation, the trade is complete. There is no need to call an exchange floor and you do not have to pay any commissions.
• Spot and forward trading - When you trade foreign exchange you are normally quoted a spot price. This means that if you take no further steps, your trade will be settled after two business days. If you are an investor, you will normally want to swap your trade forward to a later date. Although a forward trade is for a future date, the position can be closed out at any time.
• Interest Rate Differentials - Different currencies pay different interest rates. This is one of the main attractions of forex trading.
• 24 hour trading – The forex trading is available 24 hours a day.
• Profit potential - Since the market moves constantly, there are always trading opportunities irrespective of whether a currency is strengthening or weakening in relation to another currency. You would sell a currency that you expect will weaken and then buy it back when it falls thus making a profit.
• Market liquidity - A liquid market is one in which there is enough activity to satisfy both buyers and sellers. The forex market is so liquid that there are always buyers and sellers to trade with.
