First of all, what is it? Forex trading is the short hand name for the foreign exchange trading market and is also sometimes known as FX trading. Compared to other financial exchange markets, Forex trading is somewhat less volatile. This is because it is based on buying and selling currencies, which tend to fluctuate less than share prices do.
For instance, while the value of most currencies changes on a daily basis, unless there is an international crisis, this will generally be within the realm of 1% either way.
Also, central banks can’t move currency prices easily as they are largely based on supply and demand expectations. This lack of manoeuvrability leads to Forex traders focusing on high leverage deals in order to try and generate a larger return on their investments.
Leverage refers to the money you borrow in order to finance an investment – in other words, the debt you accrue when making currency purchases. The idea is then to sell it on for more than you bought it to make a profit. Leverage can often be at a ratio of up to 250:1 (so for every $1 in your account, you can control $250), but as this is an industry standard, the market is largely built to deal with such figures.
As lots of leverage is available, the Forex market is attractive to many traders. If, however, you are hoping to make money from it, you will need a good understanding of what causes shifts in currency values. Unlike the stock market, the vastly bigger Forex market is not governed from a central location, which is why it is popular with home investors. Currencies are traded five and a half days a week (twenty four hours a day) in all the major financial centres, including London, New York, Tokyo and Zurich and Sydney. When one market closes in one time zone, another one will be opening so you can work on Forex trading at any time that’s convenient to you.
Forex trading most commonly trades on what is known as the spot market, which is where currency is bought and received instantly. It also makes use of the forwards and futures markets (based on contracts rather than cash currency), but since electronic trading has become more popular, the spot market is the prime place for trading.
Before you consider opening a Forex trading account, you will need to understand the jargon. For instance, you need to know the difference between bid (buy) price and ask (sell) price. You should also investigate direct and indirect currency quotes as well as learn how to read a quote before you begin. Then you need to decide how much leverage you can afford so you can minimise your risk and make the most of your new Forex trading account.
