Introduction to Forex
What is Forex?
Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world's combined stock markets don't even come close to this.
Currencies are important to most people around the world, because currencies need to be exchanged to conduct a foreign trade and business. You have executed forex trades yourself if you have ever travelled or bought any good in a different currency than your local currency. If you have travelled to Switzerland, you certainly have exchanged your pounds into Swiss Franc.
The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world.
Why Trade Forex?
High Liquidity and Price Stability
What this means for you as a trader is that Forex most markets are highly liquid; currencies can easily be bought and sold in large quantities without prices being substantially affected. This in-turn means increased price stability. Also, the fact that currencies are traded in pairs, their value being determined by one currency’s value in relation to another’s, means that the value of currency pairs tend to stay within a certain established trading range most of the time. This is unlike stock markets which have been known to be vulnerable to all-out crashes in certain conditions.
The Ability to Trade 24/5
Unlike stocks, bonds and options, Forex markets are open around the clock between Monday and Friday. Each trading day is comprised of three trading days rolled into one because the Asian, European, and American markets overlap as they open and close throughout the day. As a result, you do not have to wait for markets to open, they are always open, leaving you free to trade whenever you like.
There are 4 global centres for Forex trading, which follows the sun from east to west; from Sydney (Australia) to Tokyo (Japan) then London (Great Britain) and finally New York (USA).
Profit in Both Upward and Downward Trending Markets
Forex traders buy, or go long, when they expect a currency pair to rise in value, and sell, or go short, when they expect a currency pair to drop in value. However, since currencies are always quoted in pairs, every position you take involves being long on one currency and short on the other. So, when buying EUR/USD, for example, you are long on the first currency in the pair and short on the second. This means that as a Forex trader you are easily able to position yourself in a way that allows you to profit, regardless of the state of the underlying market.
Low Entry and Transaction Costs
The large number of market participants and high competition between brokers has led to low entry and transaction costs compared to other financial instruments. Traditionally Forex markets were only open to institutional investors and very wealthy individuals. However, As the retail sector has grown, brokers who aggregate the positions of smaller investors and forward them to the markets have come onto the scene. Lot sizes and margin requirements have shrunk so much over the past decade or so that you can now open a Forex account and start trading with as little as $100 US dollars. The high competition between brokers have caused the spreads to become narrower and lower commissions.
Margin-based trading can be a powerful tool – with as little as $1,000 of margin available in your account, you can trade up to $50,000 at 50:1 leverage. However, keep in mind that Leverage is a double-edged sword!
Traders nowadays can execute orders within seconds as the technology and development of trading platform has made trading easier that it used to be in the old days.