Forex Trading and Forex Market
The Forex market offers an opportunity for investors worldwide to put their money in an extremely active, high volume market that trades billions of dollars in currency every single day. However, just because you have experience trading stocks doesn’t mean you will be a great Forex trader. There are some similarities between Forex and trading stocks, but there are also many differences. Trading on the Forex market can be a great opportunity for any investor, but only if they know what they’re doing. Just like any other market there’s a lot of money to be made but it doesn’t come without risk.
What is Forex Trading?
Forex, also known as the Foreign Exchange Market, is the world’s largest liquid market with trade volumes reaching billions of dollars per day. When you trade on the Forex market you are essentially exchanging one currency for another. For example, you may be buying Euros in exchange for US Dollars or vice versa. When you buy a currency it’s known as being in the long position while selling is known as the short position.
Most trades on the foreign exchange market will be executed with the help of a broker or a market maker. Traders buy currencies that they expect to go up in value compared to another currency. For example, if you were to have purchased 2,000 Euros back in the beginning 2005 you would have spent about $2,400 US Dollars. If you were to sell these same 2,000 at the end of 2005 you would have received about $2,600 US Dollars, a $200 profit overall.
Forex orders can be easily placed online with just a few clicks of your mouse. There are countless brokers and market makers you can go through to execute your trade in real time. When you close your position your account will be credited with the current value of the currency sold, whether it be for a profit or a loss.
Why Trade Forex?
There are many reasons to trade on the Foreign Exchange Market including:
- 24/7 Trading - Because the Forex market is worldwide, you can trade on it 24 hours a day, 5 days a week. While individual local markets have set hours, there is always a market open somewhere in the world at any given time. This means you can trade to your heart's content without any downtime.
- Trade Volume - Even the New York Stock Exchange has nothing on the Forex market. The foreign exchange market boasts billions of dollars in trade volume each and every day. There's an enormous fortune passing between traders on a daily basis.
- Leverage - Most brokers and market makers offer you leverage on your Forex trades. Leverage is like a loan given to you by the broker which amplifies your original investment. If your broker offers 100:1 leverage a $1000 investment quickly turns into a $100,000 stake in the market. Because currencies change value at such a slow pace leverage is needed to make a substantial profit. However, you have to be careful, as you will be responsible for losses associated with your leverage.
- Information - Unlike the stock markets, the foreign exchange markets are less susceptible to insider trading and information. It's a much more level playing field as you will have access to much of the same information as every other trader does.
Forex Trading Facts
- No Commission Trading - Make no mistake, brokers do make money on every trade you make. It just isn't from commission directly. Instead, brokers and market makers make their money in the difference between the price you can sell a currency for and the price you may buy a currency for. This is called the bid and ask price.
- US Dollar is King - The US Dollar is involved in about 90% of all trades made on the Forex market. Other popular currencies being traded are the Japanese Yen, the Euro, British Pound, Canadian Dollar, Australian Dollar and the Swiss Franc. The largest trading volume for each currency will be during times the local foreign exchange market is open for that currency.
- Top Trading Countries - Although the US Dollar is involved in a majority of trades, the United Kingdom actually does the highest trade volume with 32% of all trades. The United States isn't even close in second at 18% of trades and Japan clocks in with a meager 8% of all trades.