The term FOREX aka FX or foreign exchange simply means trading currency in the foreign exchange market, buying a currency with other. The concept is similar to situations as when you are travelling abroad, and you need to buy some of the currency for your destination. The difference in this case, is that trading forex you are likely to be paying much lower fees and no commissions, as it usually happens in airports.
In this article about Forex we will explore some of the risks and benefits of trading currencies. Also we will see how can be this done. Don’t forget to have a look on the infographic about forex at the end.
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The FOREX market is also considered one the most exhilarating, fast-paced markets in the world. In fact, it is the domain of extremely rich individuals, large hedge funds, central banks, corporations and financial institutions.
You don’t have to worry about liquidity when trading FX because you can quickly buy and sell currencies with the click of a mouse with a online brokerage accounts. Forex is probably the market that offer more liquidity in the world. The term liquidity, means that you can usually find sellers when you want to buy something, and you can also find buyers immediately when you want to sell. As comparison, real estate has low liquidity. It can take several months to complete a transaction (buy/sell a house). In Forex, it might take only milliseconds when you want to buy or sell currencies. Also, factors like its global structure, high volatility and size have all contributed to the success of this exciting foreign exchange market.
The fact that there is no central or a particular marketplace for trading FOREX is a unique aspect of this international market. Forex trading is done electronically, meaning that all transactions happen on the computer networks among all the traders across the world, instead of one centralized exchange. Just to give you a reference, a company stock would be usually available only in one stock exchange, like London, New York or Nasdaq.
The foreign exchange market is global, happening in the most important financial centers like Frankfurt, Singapore, Sydney, Tokyo, Paris, Hong Kong, Zurich, New York and London – and because of time zones, trading is open 24 hours a day, five and a half days a week. It only closes at weekends.
In other words, during the working week, when trading day is over in the United States, another Forex trading day is just starting afresh in Hong Kong and Tokyo, making the market to be active all day long with price quotes changing continually.
Risks and Benefits of Foreign Exchange
1. Investors have the opportunity to place very large trades without affecting a particularly given exchange rate, considering the size of this market;
2. This is the only market that opens 24 hours with decent liquidity for the whole day. This is the best market to trade in if you are one of those having busy schedules or a day job, and like daytrading, buying/selling positions within small timespans.
3. The use of leverage to enhance profits is widespread and well available in forex. Although this increases risks, it might also increase profits if well used.
4. In forex you usually can trade with lower margins of relative profit. compared with other markets of fixed income.
Enormous gains from FOREX trading can turn to damaging losses quickly and wipe out the majority of your account all in a twinkle of an eye, if you don’t use properly stop-losses and your access to leverage.
You need to understand this as a new trader, because the market can swing quickly to news information. Sharp moves in the price of the currency pair can sometimes be the a result of a large number of traders just speculating what will happen to a country and its economy.
How to quote currency pairs
The standard for quoting currencies is one of the biggest sources of confusion when trading Forex.
A quoted currency is done in relation to another currency to reflect the value of one, through the value of another currency. Consequently, if you want to establish the exchange rate involving the USD (US dollar) and the Japanese yen (JPY) the FOREX quote would be: USD/JPY. This is known as the currency pair.
Base Currency: This is the currency to the left of the slash (USD) from the above example.
Counter or Quote Currency: This is the currency to the right of the slash (JPY).
Cross Currency: This is a quote without the USD as one of its components. Examples are EUR/JPY, EUR/CHF, and EUR/GBP.
Bid Price: In FOREX trading, BID price means Buy
Ask Price: ASK price is Sell.
Spread: This is the difference between a bid and ask price.
Pip: This is the least amount that a price can move in any particular currency quote.
Opening and Trading a FOREX Account
When choosing a FOREX brokerage account you should consider factors like leverage, commission and fees and some other important factors.
One respectable Forex broker that you should consider is EasyMarkets.
easyMarkets has been in the market since 2003 and operate on over 300 markets. Among the advantages of this broker is that they only require an initial deposit of $100 to open an account. They have a platform which can execute orders at the exact price quoted without any errors.
One of its unique features is the dealCancellation tool which can be used to cancel unfortunate trades up to the expiration time and to save the invested amount. They have more interesting features and this will be discussed in the review below.
But also, before risking any real money, you can use their trading simulator. Their simulator shows real-time quotes, making the experience is just like how it is on a real trading account.
The first major trading technique is to buy and sell currency pairs on a long and short basis, meaning that you should go long for one currency and short for another.
Buying of derivatives which monitor the movements of a particular currency pair is the second unique method of trading FOREX.
The popular technique is to just buy and sell currency pairs in a similar way that individuals buy and sell stocks. You are trading in this way with the hope that the value of the pair will change in a favourable way. Nevertheless, you are hoping that the value of the pair increases if you go long a currency pair.
Types of Orders
Take-profit Order: This order is used by traders who already hold an open position.
Limit or Market Order: This particular order is used by a trader who wants to open a new position. A market order offers you the capability to get the currency at any exchange rate it is presently trading at in the market.
Also, limit order let the trader specify a particular entry price.
FOREX trading is an electronic trading platform where you can trade for 24 hours every day and five and a half days weekly. Currencies are traded in currency pairs and quoted directly or indirectly. Bid and ask are the two prices involved in this trading.
When it comes to mastering FOREX trading, practice is the key. You can practice with a demo account that mirrors live market prices if you are a beginner to FOREX trading.