The Basics of Forex Trading
The foreign exchange market is a global marketplace open twenty-four hours a day from Monday to Friday. The foreign exchange market has no central exchange or physical currency exchange and all trading is conducted over the counter. Most of the trading activity occurs between institutions. These institutions do not usually intend to purchase or sell physical currency but are hedging against changes in exchange rates.
The value of each currency fluctuates and is determined by demand and supply. The value of one currency in terms of another is known as the official exchange rate. This is based on the demand and supply in the open market. If you know how to predict the direction of the currency market, you can trade profitably.
Although the forex market is an excellent investment opportunity, it is not without risk. The pricing volatility can be dramatic and fast-paced, and forex trading is not for the faint of heart. Trading forex requires discipline, strong risk management, and a sound strategy. The upside to forex trading is that it offers diversification and flexibility. The market is global, allowing you to open a long or short position in a variety of world currencies.
The forex market is open twenty-four hours a day, five days a week. Traders buy and sell currencies in lots. Standard lots are equal to one hundred thousand units of currency. Micro and nano lots are smaller. Many traders try to capitalize on tiny fluctuations in exchange rates. These fluctuations are known as pips (one-hundredth of a percentage point).
Assuming that you have enough money to invest in forex, there are several risks involved. Large capital outlays can discourage some traders from trading. However, these risks are outweighed by the benefits. With forex trading, you can trade currency for as little as a couple of hundred dollars. There are many online brokers and platforms available to help you navigate the market.
In forex trading, the price of a currency pair fluctuates between two prices: the asking price and the bid price. The asking price is the price a trader will accept for purchasing currency and the bid price is the price a seller will accept. The difference between the asking price and the bid price determines the value of a trade. You can trade in a single currency pair or thousands of currencies. Forex trading requires you to understand how the currency pairs work and what each price does.
Major commercial banks control the foreign exchange market. Competition in this market is intense and each bank tries to hold on to a share of corporate business. Euromoney magazine is a great source of information about the foreign exchange market. It publishes periodic surveys of information from multinational firms.