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Forex Trading What You Need to Know About Forex Trading
The global economy has had its share of setbacks in recent years. This has lead lots of people to try and find new ways to increase their income. One such method that is gaining in popularity lately is Forex trading. Forex is short for foreign exchange. Essentially Forex trading is the buying and selling of international currencies in order to generate a profit.
What Makes Forex Trading Different?
One of the biggest differences between Forex trading and other investment opportunities, like the stock market, is the fact that Forex trading markets are almost always open. Unlike the New York Stock Exchange, or the Nasdaq, there are multiple Forex markets located throughout the world. With ForEx Market in New York, London, Sydney, and Tokyo, there is at least one Forex market open 24 hours a day. The markets do however close for the weekends. While there is a small window from 22:00 UTC (Coordinated Universal Time, approximately Greenwich Mean Time) until 20:15 UTC on Sunday that the ForEx markets close they are otherwise always open and trading.
The foreign exchange market The foreign exchange market is larger and has more liquidity than any other market in the world. Liquidity in this case is defined by the ability to sell something without causing a significant price change as well as minimizing value loss. In April of 2007 the daily volume of the foreign exchange market was at 3.2 trillion (yes, trillion, with a “T”) and it has continued to grow since then. Currently the daily volume is roughly 4 trillion dollars per day. Most of the trading takes place on the London exchange. New York and Tokyo are the next largest markets, with Sydney being the least busy of the four.
Structural Basics of Forex Trading
The format of foreign exchange pairs lists the “base” currency first. The second currency is the counter. Pricing is determined by the “counter” currency, because that is the price at which a pairing is purchased. The difference between what you can sell and buy any given currency for is called the spread. Usually the spread will be listed in a pair. For example, the USD/JPY currency pair (US Dollars/Japanese Yen) might be listed at 101.89/101.92. One could sell this pairing at the price of 101.89, or buy it for 101.92. The difference between the sell and buy price, (also known as the bid and ask, or base and counter) is the spread. You might also see this example spread expressed as “trading at 101.89 by 92.” If you had JPY and wished to sell it for USD you could do so at a rate of 101.89. If you had USD and wished to buy JPY you would do so at the rate of 101.92 per US dollar.
The Yen is the only currency in the market place that is not calculated to the fourth decimal point. This is because of the comparatively small value of a single Yen to the other currencies available. The US Dollar, the Euro Dollar, the Australian Dollar, and the Pound Sterling are all calculated out to the fourth decimal point. That is to 1/100th of one percent. This unit is known as pip, short for percentage in point and is the smallest measurement of change in the exchange rate of a currency pair. As an example, if the current exchange rate of the Euro Dollar to the US Dollar was 1.3000 ($1 EUR = $1.3 USD) and the rate changed to 1.3010 that would be an increase of ten pips.
Unlike a stock market, the currencies in the foreign exchange market are traded directly between the buyer and seller. Brokerages are involved, but there is no central clearing house. The bulk of the trading is done by major international banks which collectively represent roughly 80% of the ForEx markets’ volume. These banks are always willing to both buy and sell various currencies.
Who trades in the Forex Markets?
There are several levels that participants in the Forex trading markets fall into. At the top are the large banks. The spreads at this level are virtually nonexistent and only those within these organizations have access to what they may actually be. These might be international banking institutions like CitiBank or even National Banks such as the Federal Reserve.
Hedge Funds and Investment managers are another group of Forex traders. These are institutions which usually trade in Forex markets with the goal of deriving a profit based on speculation, or guessing “where the market is going.” These traders will often be dealing in very large transactions on behalf of wealthy investors or a number of investors who have pooled their resources together to maximize profit potential while mitigating the risk among the various members.
The last category I’m going to discuss, and probably the one most of the people reading this will interact with is Retail foreign exchange brokers. These retail exchanges can take two forms, either brokers, or dealers. Brokers serve as an agent, buying or selling currencies on behalf of their customer. They will typically charge a commission for their service which will be an additional expense to the customer beyond the price of the transaction. Dealers will on the other hand function as a market unto themselves. They offer customer buy and sell rates based upon the overall markets valuation of currency pairs. When choosing a retail exchange broker it is important to know whether they will serve as a broker or agent of their customers, or as a dealer or principal.
In Conclusion
The foreign exchange markets can seem complicated to the uninitiated but they yield good profits to the savvy investor. If you are considering investing in Forex markets it is essential to familiarize yourself with the the trading system if you want to successfully make your investment grow.
You can learn to become a successful trader by following a system created by George Smith. This system shows you how to start trading with a $100 investment and build on your bank until you are making $500 per day. To learn how you can trade with this system Click Here!
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