Forex Market Beginners Information
With over $1.2 trillion being traded every day it is easy to say that the Forex (Foreign Exchange) Market, is the largest market in the world. In fact this figure represents more turnover than all the world’s stock markets combined. When trading forex the currency of one country is traded against another. The exchange rate is the rate at which they are traded. Trades can be executed through a financial institution or broker through the phone or internet. Forex has only recently been made available to small traders with the invention of the internet and is a growing market. In 1997 there were only 1.7 million trading accounts compared to more than 6 million today.
The most commonly traded pairs are called the ‘Majors’ and comprise the Euro Dollar (EUR/USD); the British Pound (GBP/USD); the Japanese Yen (USD/JPY; and the Swiss Franc (USD/CHF). The Canadian Dollar (USD/CAD) and Australian Dollar (AUD/USD) are also commonly traded. The forex market functions through a global network of participants rather than through a central exchange with most brokers and banks using a centralized feed to ensure the reliability of their quotes. The quotes are usually made up from the top 300 or so large institutions. It has been approximated that anywhere from 70%-90% of the forex trades are speculative. This means that the person or institution placing the trade has no intention of taking delivery of the currency, they are simply speculating on the movement of the currency.
Obviously with $1.2 trillion being traded, the forex market is extremely liquid. This means that with a click of your mouse you can immediately buy and sell forex at the prevailing rate. You will never be caught holding currency you need to sell.
With the invention of the internet, trading forex has never been easier. As forex is such a highly traded market, there are a lot of brokers to choose from, offering various rates of commission (also referred to as spread) and trading platforms with different features. Most platforms will allow you to pre-enter buy and sell orders at your preferred price, along with stop loss (to minimize your loss if the trade goes against you) and profit target. Many firms also offer free ‘demo’ accounts. A demo account will allow you to practise your trading skills with virtual money before you put any real money at risk. Most brokers also offer real-time charts for forex and popular technical analysis tools.
A large advantage of trading forex is the amount of leverage that can be used with some firms offering as much as 200 to 1 leverage, allowing you to place a $10,000 trade with a $50 margin. The use of leverage can assist those with limited funds to trade large quantities on the forex market. A large number of brokers also offer ‘mini’ accounts allowing traders to place much smaller trades than standard accounts.
Forex trading also has the advantage that you can trade both sides of the market, you are able to enter trades both LONG (anticipating the market will go up) and SHORT (anticipating the market will go down).
The forex market is open 24 hours, closed only from Friday evening to Sunday evening. This means you will never be caught with opening/closing gap problems. The fact that the forex market is open 24 hours makes it a more accessible market for part-time traders as trades can be placed at a time that is practical for you.
