The foreign exchange market, also known as Forex or FX, has become very popular with financial traders. One advantage of trading this market is the size and volume traded each day. Forex trading is the simultaneous buying of one currency and the selling of another. Currency trading is carried out through a broker or dealer and are traded in pairs, for example: the Euro and the US Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY).
The exchange rate is the price of one currency in terms of another. For example, if the current exchange rate for the Euro against the Japanese Yen (EUR/JPY) is 1.2500, this would imply that 1 Euro is equal to, or may be exchanged for 1.25 Japanese Yen. The first currency in a pair is referred to as the reference or base currency and the second is known as the settlement or counter currency. The price for a forex pair is expressed in terms of the counter currency.
Benefits of Forex Trading
Liquidity is one of the major benefits of trading foreign exchange. This market is enormous, enabling traders to open and close positions easily and also prevents any one large market participant from controlling the market price. Access is also one great benefit as the forex market trades continuously 24 hours a day for 5 and half days a week. At any given time throughout the business week, a financial center somewhere around the world is open. Generally, opening in New Zealand first, moving to Asia, United Kingdom then onto America. Traders can easily find the current time in different zones from timeanddate.com.
Other Advantages of Currency Trading
Leverage can be an advantage for forex trading as a small margin deposit can control a much larger contract value. Trading opportunities occur from both rising and falling markets making short selling an easy technique for traders to utilize. The low cost of currency trading is also a great benefit, as most providers offer a spread instead of the traditional commission rates. The spread is the difference between the bid/ask price, usually less than 0.1% or just 1 pip. A pip or point is the minimum increment that a currency pair price may change. Most major pairs are priced to 4 decimals, with the exception of the Japanese Yen pairs which only trades to 2 decimals.
Trading the Forex Markets
Trading in the forex exchange market is undertaken in “lots”. A “lot” being the minimum amount of currency a trader is required to buy. Some providers offer mini or micro lots, allowing traders to partake in this market with a small account. Traders are also able to choose the time frame they wish to utilize with a range of charts available. Trading from a 5 minute chart can be useful for short term day trading, allowing smaller profits to be made more often.
Considerations of Currency Trading
Trading or investing in foreign currencies carry the same rewards/risks as participating in any financial market. Once appropriate education has been undertaken, a good trading plan developed and researched, forex trading can be very exciting and profitable.
All market participants are encouraged to fully understand any products they may use.
Reference:
- FX-CFD’s Beginners Trading Guide, MF Global Australia Limited, (e-book)
Toni Walters - I am a Day Trader and like to trade the forex markets around the world. I enjoy reading, sewing and writing short articles for local ...
Join the Conversation