The Foreign Exchange (FOREX) market is by far the largest market in the world. The $4 trillion average daily turnover dwarfs the daily turnover of the American stock and bond markets combined.
There are many reasons for the popularity of foreign exchange trading, but among the most important are:
- The available margin trading
- The 24-hour a day 5 days a week liquidity
- And low if any commissions.
Of course many commercial organizations are participating purely due to the currency exposures created by their financial institutions accounts on their import and export activities.
Investing in foreign exchange remains predominantly a domain of the big professional players in the market such as hedge funds, banks and brokers.
Nevertheless, any investor with the necessary knowledge is and complete understanding of this market can benefit from this exciting arena.
What is Currency Trading
Currency trading is done, when a trade off is made against the strength and weakness of two or more opposing currencies. For example the currency trading of the Euro against the US dollar or that of the Japanese Yen.
In order for a Forex trader to be successful in currency trading, he needs to look at the market trends and try to analyse where and in what direction he might think that the market is going to go.
There are many factors which can (and do) contribute to the daily currency trades being made, and these can have almost immediate effects to the currency trader. In the world of online forex trading such factors could be:
- The outbreak of war
- Natural (sometimes called Acts of God, in insurance terminology) disasters such as hurricanes, earthquakes, typhoons
- Secessions and the breaking of trade blocs as recently witnessed with Britain’s exit from the Euro bloc (Brexit)
All these factors impact directly on the supply and demand of currencies and commodities. For example, war could interfere with the supply and delivery of crude oil. Terror acts also play a role in currency trading. Although, traders today, and after 9/11 tend to take such things more in their stride now, and the currency trading markets usually correct themselves pretty quickly today.
In internet forex trading, an exchange rate represents the value of one currency against that of another. An exchange rate fluctuates over time.
The US dollar is the most traded currency in the world and we can look at the value relative to a third currency, which may be obtained by dividing the US dollar rate for that of another.
For example, if there a 120 Japanese yen to the dollar and 1.2 euros to the dollar, then the number of yen per Euro is 120/1.2 = 100.
The magnitude of numbers is not, by themselves, indicative of the strengths or weaknesses of any particular currency. Meaning that the US dollar could be rebased tomorrow, so that one new dollar was worth one hundred old dollars.
All the numbers, in the table, would be multiplied by one hundred – this does not suggest, however, that all the world’s currencies just got weaker. One way or another, currency trading is almost as old as mankind itself.
What is Margin Trading?
Foreign exchange trading is normally undertaken on the basis of margin trading or gearing.
A relatively small deposit is required in order to control much larger positions in the market. This is possible because when you buy one currency you sell another.
Margin requirements are set by your broker and vary from as little as 1% to 10% margin.
This means that in order to trade 1,000,000 USD on 1 % margin, you need to place just 10,000 USD by way of security.
That same security of 10,000 USD, traded on a 10% margin could control up to 100,000 USD worth of one currency against another currency.