Foreign Exchange Trading or simply FX or even forex describes the trading
of different currencies of the world. The forex market is the largest in
the world with trades amounting to more than USD 1.5trillion every day.
Typically, most forex trading is speculative, with only a small part of
the market activity representing governments' and companies' basic
currency conversion needs.
The main centers for trading are Sydney,
Tokyo, London, Frankfurt and New York. By virtues of it being a world
market, it is a 24 hour market where online forex trading is conducted
across the globe. This is a major advantage as it provides investors with
a unique opportunity to react instantly to breaking news that is affecting
the world markets. The forex market is known to have superior liquidity
and thus there are buyers and sellers present perennially to trade in this
market. The liquidity factor ensures price stability and narrow spreads
and comes mainly from banks that provide liquidity to investors,
companies, institutions and other currency market players.
Unlike the stock market foreign exchange trading is not conducted
through a central exchange but something similar to the OTC (over the
counter market). It uses sophisticated forex trading software recognized
globally. The most commonly traded currencies are the EURUSD, USDJPY,
USDCHF and GBPUSD. Trading in the forex market means the simultaneous
buying/selling of a currency. The combination of two currencies being
traded is called cross. Forex trading is done without commissions and thus
proves to be a hugely attractive opportunity for investors dealing on a
daily basis. Moreover, the forex market is dynamic, and there exists
trading opportunities at all times no matter whether a currency is
strengthening or weakening in relations to another currency.
The spot market is the largest forex market as it has the largest
volume of foreign exchange currency trading. The market is called the spot
market because trades are settled immediately. In practice, however, it
takes two banking days. There are virtually no restrictions in the forex
trading and the forex market thereby allowing you to enjoy trading
opportunities during any market condition. If you are a commercial
investor, you may need to swap your trade forward to a later date. This is
called forward trading and can be undertaken on a daily basis or for a
longer period of time. Although the forward trade is for a future date,
the position can be closed at any time and the closing part of the
position is then swapped forward to the same future value date.
Trading on margin means that you can buy and sell assets that represent
more value than the capital in your account. Forex trading is usually
conducted with relatively small margin deposits. Leveraging allows you to
hold a position worth up to 100 times more than your margin. This is
useful since it permits investors to exploit currency exchange rate
fluctuations. However, without appropriate risk management high leverage
can lead to both large losses and gains.
Spreads and Pips - The spread is the difference between the price that
you can sell currency at and the price you can buy currency at. A pip is
the smallest unit by which a cross price quote changes. This is shown when
you compare the bid and the ask price, for example EURUSD is quoted at a
bid price of 0.9876 and an ask price of 0.9879. The difference is USD
0.0003, which is equal to 3 pips.
Up until recently, the forex market, given its large minimum
transaction sizes and-stringent financial requirements, was dominated by
big professional players like banks, hedge funds, major currency dealers
and the occasional high net-worth individuals. However, now several global
companies are now offering small companies, traders and investors small
transaction trades with the same price movements and rates.
