What is FX? Forex Trading Explained
Forex Trading, or FX, is considered one of the largest markets in the world. Investors use this market to make profits on the fluctuations between currency rates. Trading on the FX market is highly risky, and people performing trades, should be extremely cautious when making any foreign currency trades.
Forex trading is considered an over-the-counter market, and is often avoided by beginner investors. An over-the-counter market describes an exchange market that does not a physical place where investors go to buy and sell currencies. Instead; trading is conducted via the internet. The FX market operates 24 hours a day, seven days a week; and is only closed on major holidays. Experts estimate, that each day, approximately $4 trillion dollars goes through the FX market.
People invest in this market, for the same purposes as making trades in any other market. The objective of investors is to sell currencies at a higher rate than what they purchased them for. The difference in these amounts is a profit for investors. The price difference in currencies is often very small. It is often represented in terms of pips. One pip is equal to 1/100 of a penny, or $0.0001, and represents a very small amount; however, when this amount is multiplied by many quantities of the currency, the profit or loss can be substantial. For example, if a currency’s rate was $1.0022 when purchased, and $1.0025 when sold, the difference is 3 pips.
When investing in this market, investors should use caution and keep several factors in mind when making all trades. Two of the most important factors to look at are the country’s economic and political situations and positions at the time of sale. Investors must use currency speculation, to guess where prices of currencies are going. When currencies are traded on the FX, they are always traded in pairs, and currently the Forex market has over 150 foreign currency pairs that can be traded. Of all the currencies that are traded, the most common ones traded are the Euro, US dollar, Japanese Yen, Swiss Franc and the British Pound.
All trades on this market are conducted by purchasing one currency by selling another. Almost all Forex trading is conducted online, through a Forex broker; and all transactions are electronic. To become an investor in the FX market, a person must open an online account with a Forex broker, deposit money and then begin trading. Many Forex brokerage firms allow investors to open Forex trading accounts with minimal deposits. They also allow qualified investors to trade on margin. This requires the investor to put only a small down payment on a trade. If the trade makes a profit, with a margin, the investor can make a very large profit. Trading on margins also offers great risks when investors sell currencies for lower prices than what they paid for them.
All rates listed on the exchange are in terms of pairs. The base currency is always listed first; while the quote currency is listed second. For example, assume the FX states: EUR/USD 1.5512. To translate this in the Forex, a person must pay $1.5512 to purchase 1 Euro. The second listing is the amount required to buy 1 unit of the first currency listed.
Because the Forex market is extremely volatile, currencies fluctuate constantly, and therefore, investors should use caution and a strategy. Most experts of the FX, suggest that all traders, in this market, should develop a trading strategy or system before making any trades. Before investing in the Forex market, investors should research methods and strategies, and choose one that they are comfortable with.