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Understanding Forex Trading

By Edited Jan 22, 2014 0 0

When Forex trading began, it was limited to banks and institutional traders only. Now with the advancement in technology, foreign exchange trading is available to small traders as well. Now ordinary people can take advantage of the benefits of Forex trading, by simply using many online trading platforms.

Forex trading is similar to the stock market accept that the currencies are on a floating exchange rate. The trades are always done in pairs, namely Dollar/Euro,  Dollar/Yen, and so on. As much as 85 percent of the daily transactions involve trading in a major currency.

There are four major currencies used for investment purposes. These include the Euro against the American dollar, the American dollar against the Japanese Yen, the British pound against the US dollar, and the US dollar against the Swiss franc. However, no dividends can be earned on trading foreign currency.

Let's assume that you believe a certain currency will gain value or appreciate, you can exchange the second on for the first currency. If the currency does appreciate, you are then able to exchange it for the first currency and make a profit.

The foreign exchange market is open daily, so while some part of the world is sleeping Europe is probably trading with Japan. Dealers at major banks  or brokers perform transactions on the Forex market. Since the market is open 24 hours a day a client may ask their broker to execute an order overnight.

Unlike the stock market, the price movement in the foreign exchange market is very smooth. It is estimated that the Forex market has a daily turnover of $1.2 trillion. The market is always open and never stops, even during a crisis. Believe it or not, the currency market is the largest and oldest financial market in the world. It can be called the FX market for short or alternatively, the foreign exchange market.

In the past, only banks and major currency dealers were the main dealers. They were able to take advantage of the foreign exchange market's liquidity and use market trends to make a profit. In addition,  only they were able to make the large minimum transaction required for trading. However, today the foreign exchange broker is able to offer small trader to the public, to buy or sell on this market. The Forex brokers give any trader, the opportunity to trade at the exact same rate and price movements as the big banks and other financial institutions.



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