A Simple Introduction to Forex Trading
Short for Foreign (currency) Exchange, Forex is the world’s biggest market for trading in currencies. As much as 2 trillion US dollars worth of currency are traded on the Forex on a daily basis. Compare this with the approximately 25 million US dollars traded on the NYSE and you’ll get the picture - Forex is huge.
So what is Forex all about? Simply put, Forex entails buying one currency, let’s say Turkish Lira, and selling another, say US Dollars. In Forex, currencies are always traded and quoted in pairs. The exchange is made through a broker.
Just like the stock market where you are investing in a company, with Forex you are in a way investing in a country. If your company is a success, the value of your stock goes up. Much the same principle is at work in Forex. If the economy of the country whose currency you are trading is robust, the value of that currency will also go up - and you can then sell it for a profit.
Unlike stock markets, there is no “trading pit” in the world of Forex. Forex operates through the internet and other electronic communications and runs 24 hours a day, 5 days a week.
It has only been in the last several years that the Forex has been open to the average person to invest in. The Forex market itself has been around since 1971, but for most of its history only large companies and a few very wealthy individuals possessed the resources to be able to trade in foreign currency. Today however, anyone with a high speed internet connection and a small initial investment (as low as 50 US dollars) can get in on the Forex market.
The seven most commonly traded currencies on the Forex market are U.S. Dollars (USD), Euros (EUR), Japanese Yen (JPY), UK Pounds (GBP), Swiss Francs (CHF), Canadian Dollars (CAD) and Australian Dollars (AUD). Foreign currencies are identified by means of a three letter code. The first two letters stand for the country, while the last letter identifies the nation in question’s currency.
For example:-
USD: U.S. = United States, D = Dollars.
GBP: GB = United Kingdom (Great Britain), P = Pounds.
At any given time, business is going on somewhere in the world. Global business never sleeps, and neither does Forex. This can be beneficial to you - you can trade on the Forex market any time that is convenient to you.
There are seven currencies on the Forex which are called Major Currencies, due to their being the most heavily traded currencies on the market. The biggest four are, in order: U.S. Dollars (USD), Euros (EUR), Japanese Yen (JPY), and UK Pounds (GBP). The remaining three are Swiss Francs (CHF), Canadian Dollars (CAD) and Australian Dollars (AUD).
Advantages Of Forex Trading
There are a few advantages which the Forex trader enjoys which those who trade in the stock market do not.
1.Unlike with stock brokers, the investor does not pay commissions, per se, to the broker. Instead, the dealers in Forex trading receive part of the “spread” (that is to say, the difference) between the buying and selling price of currency. This is generally a very small amount per trade; a fraction of a percent.
2.You can trade on the Forex market any time which is convenient for you, unlike the stock market - it is closed only on weekends, from 5pm Eastern time on Fridays to 12AM on Mondays.
3.As opposed to the stock market, it is nearly impossible for companies or individual investors to manipulate the Forex market. The volume of Forex trading each and every day prevents any one actor from having undue influence. We all know of instances of the stock market being artificially influenced by unscrupulous persons and companies however.
4.Forex trading can be done with borrowed capital, meaning that you need not have hundreds of thousands in liquid assets to trade currency in large numbers. This concept is called Margin Trading. A small amount of your own capital (less than 5 percent) can be used to leverage a large chunk of borrowed assets, which may then be invested. Forex is traded in what is called lots, the normal size of a lot being 100,000 US dollars. Depending on the dealer with whom you deal you may be able to trade is smaller amounts, these are known as mini-lots or micro-lots.
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