An Introduction to Trading On Forex. The origins of the Forex market that we know today came about following the move away from fixed currency exchanges to new 'floating' currency rates in the early 1970's. Since this time the market place has steadily grown, with interest fueled by advances in technology such as telephone dealing and of course computers. These have allowed for ever more participants to enter the market.
Foreign Exchange is not one central market. Instead it is
comprised of a network of several thousand trading institutions comprised of Central Government banks, International banks, private and commercial companies and dedicated brokers. While there is no central location associated with Forex, most trading is based around key trading centres. The most important of these are regarded as being London, New York, Tokyo, Hong Kong, Singapore and Frankfurt.
comprised of a network of several thousand trading institutions comprised of Central Government banks, International banks, private and commercial companies and dedicated brokers. While there is no central location associated with Forex, most trading is based around key trading centres. The most important of these are regarded as being London, New York, Tokyo, Hong Kong, Singapore and Frankfurt.
While there are a number of big players who make use of the currency markets for business dealings and investment, Forex is also accessible to the smaller investor. Access to deal on Forex has been made possible by new trading regulations which govern available transactions sizes and changes to financial regulations.
The Interbank trading size of $100,000 dollars per round lot has now been broken down into smaller tradable lot sizes. Small investors can now take control of these lots via 'leverage'. The amount of leverage you will be given by a broker will often depend upon your trading experience. However, typically a leverage of 100:1 will be offered. This means that even with a relatively small deposit of $1000 you will be able to control a $100,000 dollar currency exchange.
So why have so many traders begun to trade on these markets and what are the key benefits for an investor?
- Accessibility - the Forex market is open around the clock, 24 hours a day, 5 days a week. You can place transactions on the markets at any point during this time. Trades can be executed via your computer across the Internet in just a matter of second.
- High Liquidity - unlike stock investments, currency trading is extremely 'liquid'. The high number of transactions on the market around the clock means that there is always a buyer or seller for a particular currency so you will have no problems in getting your orders filled no matter what time of day it is.
- Open Market - the market is considered 'open' and 'transparent'. Currencies moves are dictated by news flow and changes in the outlook for national economies. There can be no 'insider trading' as this information is readily accessible to each trader of the market at the same time.
- No commission costs - the cost of each transaction is already built into each trade and is known as the brokers 'spread'. This is the difference between what a currency pair can be bought at and what it can be sold at.
So How Can You Profit From Forex?
Currencies are always traded in pairs - the US dollar against the Japanese yen, or the English pound against the euro. Every transaction involves selling one currency and buying another, so if an investor believes the euro will gain against the dollar, he will sell dollars and buy Euros.
Currency trading always involves selling one currency and buying another. For this reason you will always see currency prices quoted in pairs, for example the Euro against the US Dollar (EUR/USD).
If a trader believes that the outlook for the Euro looks more favourable in relation to the dollar, he will buy Euros and sell dollars. This would be known as going 'long' EURUSD.
The potential to earn profits exists from identifying these shifts in valuations. The constant fluctuations of the markets offers plenty of opportunities to earn profits. You can identify these times by the use of both fundamental factors and technical analysis as part of your trading.
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