What
is forex?
Let's
start by answering “What is forex trading?” Well Forex, foreign
exchange and FX all are different names given to the same thing --
the international trading market where foreign currencies are bought
and sold. If you've ever travelled overseas you would have already
made a foreign exchange trade, you sold your home country's currency
to purchase some of the foreign currency. When you came home you do
the reverse, sold the foreign currency to buy your home currency
back. As exchange rate fluctuates you may have noticed the difference
in the buying power of your money.
Every
day a staggering 6 trillion US dollars exchanges hand across the
globe, this makes foreign exchange the largest financial market in
the world. The part of the foreign exchange trading market that we
are interested in is called the spot market. It's called the spot
market because currencies are traded immediately or on the spot. The
spot market accounts for nearly 2 trillion dollars a day. If you
added up the world's three biggest stock markets, New York, Tokyo and
London, the forex spot market would still be 15 times bigger. The
enormous size of the forex market means that it is incredibly
efficient.
A
big part of this huge market is thanks to the huge amount of
participants. There are 2 types of market participants,
-
Commercial Traders:
Large corporations or banks 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 -
Retail (A.K.A Speculative) Traders:
Traders who trade currencies for profit. Most forex trading is speculative by analysing 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
Retail
traders, such as you and I, are part of this spot market. We use
small shifts in the exchange rate between currencies to make a
profit.
The
spot market accounts for nearly 1.5 trillion dollars a day. If you add
up the world's three biggest stock markets, New York, Tokyo and
London, the forex spot market would still be 15 times bigger. The
enormous size of the forex market means that it is incredibly
efficient. Unlike other markets you may be familiar with, there is no
centralized marketplace for forex. Instead currency simply trade over
the counter in whatever major market is open at that time. The
trading week for forex begins Monday morning at 6 a.m (GMT+8) in
Sydney Australia and follow the Sun westward as the world's major
financial capitals open and closed from Tokyo to London and finally
closing at 4 a.m. (GMT+8) on Saturday morning, 5p.m evening in New
York. This unique opportunity gives forex traders the chance to trade
twenty-four hours a day, 5 days a week. This kind of continuity helps
with price stability and keeping very tight spreads.
Figure 1 : Trading time in FX
FX
markets and prices are mainly influenced by international trade and
investment flows. FX prices are also influenced by economic and
political conditions, such as interest rates, inflation, and
political instability (the same factors that influence the equity and
bond markets). This means that currency prices are constantly
fluctuating in value against each other, offering multiple trading
opportunities.
Forex
traders attempt to take advantage of all these and by buying or
selling individual currencies to speculate on the future value of one
currency relative to another to make a profit. Almost every day new
economic reports and data are released that affect the values of
currency traded worldwide. A great way to familiarize your with
currency trading is to experience it first-hand. Most brokers provide
the option of opening a demo account which you can use as a training
ground. With a demo account you will be able to see the currency
prices change at different times of the day and get a sense of how
the forex market react to political and economic information and
access all of the resources and tools available to help you trade.
The market charts, news, research and more will be the same as a live
account.
Next : What Currency can we trade? >>
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