What is Forex Trading?

The foreign exchange market (Forex, FX, or Currency Market) is a worldwide, decentralised, over-the-counter financial market for trading currencies. It is the largest financial market in the world with a volume of over $1.5 trillion a day worldwide*. Total forex trading volume is well over three times the total of the stocks and futures markets combined.

What Is Forex Trading All About?

What is forex trading all about?

Is it about finding your inner self? Is it about understanding of how currency markets provide global trading equilibrium? Is it about becoming a better person?

I don’t think so. I would say that forex trading is about making money.

It is as simple as that. And that is precisely why you are here…

Questions that are often asked by aspiring traders are: “What kind of trading approach should I use?

Day trading, swing trading, position trading? How many indicators should I use? Should I follow the TV news channels?…”

If you are facing similar dilemmas let me make an analogy.

If you were attacked in a dark alley and you felt that your life was in real danger what kind of defence technique would you attempt to use.

Would you attempt to kick your assailant with some fancy kung fu move that you saw in a movie?

Or would you use some basic but brutally effective “knee to the groin”, “thumb to the eye” technique that is easy to implement and that you are 100% certain will have an effect?

When you have your hard-earned money riding on your trades maybe your life is not at stake by your and your family’s livelihood is.

What is FOREX?

This is a question which people ask very often recently.

First of all, “Forex” is an acronym of Foreign Exchange. The Foreign Exchange market also referred to as “Currency Exchange” or “FX”, is the largest financial market in the world.

The daily volume in the forex market reached $4 trillion this year according to the latest report released by the Bank of International Settlements. No other market is able to deal with this huge amount of money.

Forex trading is basically trading world currencies against each other. For example, in the United Kingdom the currency in circulation is called the British Pound (GBP) and in the United States the currency in circulation is called the US Dollar (USD). An example of a currency (forex) trade is to buy the British Pound while simultaneously selling US Dollar. The world currencies don’t have a fixed exchange rate and they are always fluctuating.

Although Forex is not a new business, it is becoming more popular recently due to several advantages it provides to investors. Of course, the growth of forex trading goes together with more tools available for both long-term and short-term traders. Forex trading became much easier with with the help of fast computer and internet. You can just sit in front of your personal computer and trade world currencies from your comfortable home.

Financial centers around the world function as anchors of trading between a wide range of buyers and sellers. In deed, forex transactions are already a part of our life. For example, you exchange your money into another foreign currency when you go abroad to spend your holiday. Buying things online from another country is another example.

The foreign exchange market has unique advantages and there are several reasons to start forex trading:

– Forex market has the largest size and the liquidity throughout the world. No single entity can control the market for a long period of time.
– You can trade 24 hours a day (except weekends). Trading starts at Monday 7am, New Zealand time and closes 5pm New York time on Friday.
– Forex trading is suitable for small investors. You do not need thousands of dollars to start trading.
– It does not matter if the market is going down, you can make money whether the market is going up or down.
– The use of leverage gives you an advantage to enhance your profit. You can a 1000 unit currency position with $10.
– Technical analysis works very well.
– You can open a free demo account to gain experience or test your trading system.

What is Forex Trading and how does it work?

History of Forex

Traditionally, retail investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.

There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

In the foreign exchange market there is little or no ‘inside information’. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Market Participants

Commercial Traders:

Large corporations trade on the FX market to control revenues and expenses incurred in various currencies through hedging whereby a trade or multiple trades are opened in order to try and minimize on the losses in other trades.

Speculative Traders:

Investors trade currencies for profit. Most forex trading is speculative by analyzing market and political news (fundamental analysis) and/or studying the chart history of an instrument (technical analysis). Unlike other asset markets, in forex it is possible to profit from a currency losing value as it is from the currency rising in value.

Potential Advantages of the Forex Market

  • Forex investing can offer some of the best reward/risk opportunities of any financial market
  • Forex market hours are one of the most flexible of any financial market
  • Massive trading volume, resulting in a high level of liquidity (the ability of a market to accept large transactions)
  • No-one can corner the market
  • Forex trading has among the lowest start-up costs in terms of money and time, of any financial market
  • Traders can profit from the smallest movements in the exchange rate through the use of leverage
  • Traders can earn steady income on open positions through rollovers/swaps
  • Free “Demo” Accounts, News, Charts, and Analysis
  • “Mini” and “Micro” trading through the Meta-Trader 4 trading platform

Potential Risks of Trading FX

  • Leveraged trading puts your capital at risk. You could lose all, or a large portion, of your trading capital if the market makes a significant move against your current open position/s
  • Your losses may exceed your deposits
  • Past performance does not guarantee future performance
  • Tax benefits (if any) are subject to change and depend on your personal circumstances

Which Currencies are Traded?

There are many currencies and combinations of currency pairs that are traded on the market. Here is a list of the major currency pairs:

SymbolCountryCurrencyNickname
USDUnited StatesDollarBuck, Greenback, Reserve Currency
EUREuro membersEuroFiber, Unified Currency
JPYJapanYenYen
GBPGreat BritainPoundCable
CHFSwitzerlandFrancSwissy
CADCanadaDollarLoonie
AUDAustraliaDollarAussie
NZDNew ZealandDollarKiwi

*Source: http://www.fxweek.com/fx-week/news/2292891/fx-now-a-usd53-trillion-per-day-market-says-bis