Foreign exchange (Forex) trading involves buying and selling of currencies. Transactions happen in the forex trading market, which is considered as the biggest and most liquid trading market in the world – for a very good reason. The average daily trading volume easily exceeds $1.9 trillion; and this includes practically every known currency the world over.
In major financial cities such as New York, Zurich, Sydney, and Hong Kong, the trading markets are open 24 hours a day, 5 days a week. Before the advent of the internet, only big companies, banks, institutional investors, and hedge funds could afford to trade in the currency market. The internet changed all that as even small investors can now buy and sell currencies.
The Forex Market Explained
Currencies play a major role in world economy. To make it possible for businesses to transact on a global level, and for individuals to travel to foreign countries, currency exchange must be facilitated. Unlike commodities and stocks that are traded on a physical exchange floor, forex trading can happen online.
Prices of the different currencies are based on the law of supply and demand, placing currencies among the most volatile investment vehicles available. Small but frequent price movements happen on a daily basis.
To enable investors to make more money from trading, leverage is used. They get to control a huge sum for a small amount of investment. Simply put, this is no different from borrowing money to increase the ROI. It is therefore possible to use leverage at say, a 250:1 ratio; meaning, you only need to invest $1,000 in order to control $250,000 in currencies.
The forex market offers a host of possibilities for investors to consider. For one, you decide when to stay or exit a particular position. This could mean anywhere from a few minutes to several months.
How Trading Is Done
There are basically 3 ways to trade Forex.
• Spot Market – This is the biggest market that lets investors buy and sell at current prices that are dictated by supply and demand.
• Forward Market – Here, actual currencies are not traded. Two investors instead enter into an agreement to buy and/or sell particular currencies at a specified time and price. In this market, contracts are traded OTC or over the counter.
• Futures Market – Investors in this type of market deal with standard futures contracts on commodity exchanges such as the NY Mercantile Exchange. Although many proponents claim that this option is easy and profitable for the average trader, it is actually not as simple as these people portray the futures market to be.
No one can say which particular trading method will work well on an investor but the person himself. With proper education, a prospective investor can decide for himself the type of trading method that will best work for his trading needs and goals.
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