The Forex Market
Introduction To The Forex Market
The foreign exchange, or forex market (currency market) is a worldwide financial market for trading currencies. Currencies can be bought and sold on a continuous basis Sunday afternoon through Friday afternoon USA time. The forex market is decentralized and is the largest financial market in the world.
The currency market assists with facilitation of international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import Australian goods and pay for them in Australian Dollars even though the business' income is in US dollars. The difference in price between the two currencies is the current exchange rate, and these currencies must be exchanged to complete the transaction. The currency market also supports direct speculation, investing and day trading for short term and intermediate term trading profits.
All currency transactions are the same, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after decades of government restrictions on foreign exchange transactions.
The forex market has huge trading volume representing the largest asset class in the world. The liquidity of the foreign exchange dwarfs all other financial markets because it is a worldwide market with more participants. Retail traders use leverage to enhance profit and loss margins and with respect to account size, making it very attractive to most anyone with an interest in trading, speculating, or day trading.
According to the Bank for International Settlements, as of April 2010, average daily turnover in global foreign exchange markets is estimated at $4.0 trillion, a growth of approximately 20 % over the $3.2 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US $4.0 trillion. As of November 2012 this daily turnover had exceeded $5.0 trillion per day, 1.5 trillion per day of this total was retail forex trading.
The Spot Forex Market
The spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, world political situations, as well as the perception of the future performance of one currency against another. Spot transactions are bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. If you would like to become a foreign exchange trader you will be trading the spot market and the prevailing quotes or spot prices.
What Is Forex Trading?
Forex trading is trading currencies from different countries against each other. An example of a trade is to buy the Euro while simultaneously selling US Dollar. This is called buying the EUR/USD. Fx trading is buying a pair that is rising and closing out the buy transaction for a profit or selling a pair that is falling and closing the trade at a lower price than you sold it for a profit. Buying or selling a pair can be done inside an online brokerage account, similar to buying or shorting a stock online.
Why Would You Attempt to Trade The Forex?
Pure and simple, all traders trade for one reason, with profit as the goal. If they are short term traders or day traders, or if they hold onto their positions longer, the goal is to make a profit. The goal is to buy a currency pair and sell it for a higher price, or sell a currency pair and buy it back for a lower price.
Advantages of Trading Currencies
When you compare trading currency with other financial markets there are several advantages. This market is highly liquid, so market size and liquidity is an advantage. The forex market is easy to enter because of the leverage. You can get leverage on your deposited funds of 50:1 inside the USA and outside of the USA you can get much higher leverages on your deposited funds. The leverage means you need less money go open an account and start trading live. Also you pay no commission to buy and sell currency pairs. The profit potential is large if you have an effective trading system, and we have one at Forexearlywarning. Many brokers offer guaranteed stops so applying risk management principles to your trading is another advantage. These three advantages alone stack up well against other markets and this market is likely the most attractive of all markets for trading.
Some traders also believe that since it is a 24 hour market that this is also an advantage. This is a bit of a fallacy as entering trades should be conducted in the main trading session only, which is about a 5 hour window of time. This will be discussed at length in the intermediate course and below in the beginner course.
What Currencies Can Be Traded
There are eight major currencies that forex traders trade regularly. These include the US Dollar (USD), the Euro (EUR), the Canadian Dollar (CAD), the Swiss Franc (CHF), the British Pound (GBP), the Japanese Yen (JPY), the Australian Dollar (AUD) and the New Zealand Dollar (NZD). At Forexearlywarning we write trading plans and give live trading signals for 28 pairs comprised of the eight major currencies with our system.
What Pairs Can Be Traded?
The eight major currencies can be combined into 28 currency pairs. Fx market traders focus their trading on these pairs the most. Since the most widely traded currencies are the US Dollar and the Euro, these pairs get traded most frequently, however all 28 pairs have significant trading potential and should not be ignored.
Of the 28 most frequently traded pairs seven of the 28 are considered major pairs. A major pair is any pair that has the USD on the left or the right like the GBP/USD or the USD/CAD. The other 21 pairs are called exotic pairs. The exotic pairs are any pair where the USD is not on the left or the right like the EUR/JPY or AUD/CAD.