Forex – what is it?

Anyone unfamiliar with trading on the stock exchange will have trouble understanding what Forex stands for. Forex is the abbreviation for the Foreign Exchange Market and is also known as FX, or the Currency Market. It is the global market that buys and sells currencies and due to the amount of trade it undertakes, it is probably the largest market in the world.

Important facts about forex trading

Forex works by exchanging one currency for another. The exchange price is agreed on the ‘over the counter’ (OTC) market. When currency values rise, they are said to ‘appreciate’ and when they fall they are said to ‘depreciate’. These rises and falls are due to economic and global political factors. A forex trader is successful when profit is made from speculating on which prices are likely to change, and in which direction they will go. The OTC forex market does not have a physical location. Trade is carried out over twenty-four hours a day, seven days a week, through a network of banks, businesses and traders. Trading on forex follows the global clock, starting in Wellington, New Zealand and finishing in New York, USA on Friday night. Twenty-four hour trading avoids price gapping, (when a price automatically goes up without any trade occurring). Forex trading occurs in pairs – a base currency (on the left) against a counter currency (on the right).

When a currency appreciates in value (strengthens) or depreciates (weakens) price movements occur. Currency pairs are bought when the base currency is thought to strengthen against the counter currency and sold when the base currency is thought to weaken against the counter currency. As forex is a margined or leveraged product, traders forfeit depositing the full amount of their position to place a forex trade. Instead, they deposit a small fraction of the full value and therefore their initial capital outlay may produce higher profits or losses than traditional forms of trading. Most currency pairs are quoted to five decimal places. The fourth place, which marks the change in price, is usually known as a ‘pip’ or percentage in points. With the exception of Japanese yen, all currency pairs that show a difference between the ‘bid and ask’, is referred to as ‘the spread’.

Online trading in forex
Before starting to trade on the foreign exchange market, traders should be well equipped with the information they need. Without this knowledge, traders are at risk of losing all their capital. Lots of companies offer help and advice, alongside ways in which to trade in forex online. CMC Markets for instance, offers trading advice in the form of video as well as online training guides, FAQs and troubleshooting support. Trade with foreign countries can be risky because of the fluctuation in currency values. Trading Forex can alleviate or ‘hedge’ this risk by fixing the rate at which the trade transaction concludes. This is done by trading currencies in the forward markets to lock in the rate, thereby ensuring the exchange rate for the goods trade.

Speculation over the risks involved in forex trading has been made in the past. Currently, the market is controlled by a consortium of global banks known as the interbank market. These banks are regularly audited to keep them safe and preventing rogue traders to influence the price of a currency. An Electronic Communication Network, or ECN, is presently in the process of being created. This will centralise the online exchange and hopefully pricing will become clearer to traders. Good timing is the crux of profitable trading. To be any good, the trader should take advantage of all forms of information available and be aware of his or her own personality traits so that good trading habits are not replaced with impulsive behaviour patterns.

To conclude, trading on the foreign exchange market can be very profitable if a trader follows some basic rules. It is important to keep up to date with current world affairs especially of those countries involved in upcoming trades as being aware of political, financial and economic information is paramount to being successful. Knowledge of how the market operates is just as important, so studying the online tutorials will give you the tools you need to become a profitable trader.

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