Introduction to the Market
What is FX?
Forex is an abbreviation that stands for Foreign Exchange. Forex trading is where a trader buys one currency in exchange for another. This buying and selling is done simultaneously and the currency that is sold by a trader is simultaneously exchanged for the currency that is then bought by the trader. This trading is done in the OTC market or Over The Counter Market. This OTC market is formed by an Interbank Network of big banks that provide the exchange rates and currency quotes at which these forex currencies are traded and exchanged at. In There is no centralized market place and currency trades are carried out through this decentralized interbank network. Forex is also known as Forex or Trading.
Forex currencies are traded in pairs, for example the EURO when traded against the US Dollar is denoted as the currency pair symbol of EURUSD, The Great Britain Pound when traded against the US Dollar the currency pair is denoted as GBPUSD and when the US Dollar is traded against the Japanese Yen the currency pair is denoted as USDJPY.
Who trades Forex Currencies
The market has various participants who trade fore various reasons. These market participants who trade Forex currencies are:
Governments - governments trade currencies so as to facilitate payment of goods and services that they get from other foreign countries.
Multinational Companies - these companies trade forex currencies so as to facilitate doing business between the countries they operate in and as well as facilitate movement of cash from one country to another.
Brokers - The brokers trade and place trades in the market on behalf of retail traders and speculators.
Speculators, Investors and Traders - these are the main participants in the trading market. These participants make up 95% of all transactions carried out in the trading market. This group of participants provides liquidity in the trading market. What this means is that these group of traders ensures that any one can exchange their currency at any time because this group is always trading and willing to carry out exchange rate rates at any time of day. If there were no speculators then anyone wanting to exchange their currency for another would have to wait until someone else from the country they want to business with is ready to exchange their money and at only that time would the currency exchange transaction take place. But because of the many speculators and traders there is always someone willing to exchange any currency for another at any one given time.
Why Trade Forex - Advantages of Forex Trading
Market is the biggest and most liquid financial market in the world. The market transacts $7.2 trillion dollars everyday. Traders trading this market therefore have the opportunity to trade and transact in the largest financial market in the world. This means that this market provides a lot of opportunities to trade and make profits in this market.
The market is open 24 hours a day meaning that a trader can trade during any time of the day and can open and close any trade at any time that they want. The market being a 24 hour market means that the market is also very active and provides a lot of trading opportunities at any particular time of the day. The most active trading times being the New York, London and Tokyo session when most trading activity is carried out.
Leverage in Forex is also another reason why many investors and traders choose trading. Leverage is what makes accessible to retail traders because retail traders can begin with little capital of their own & use leverage to borrow the rest of funds required for trading. Money that the trader deposits is referred to as the trader's margin and a trader can continue borrowing money using this leverage option as long as they have the required margin in their trading account. For example a trader using leverage 100:1 will only require to have more than $1,000 in their account to be able to open and trade using standard lots. 1 standard lot is equal to 100,000 units of currency. With $1,000 dollars using the leverage ratio of 100:1, then a trader can borrow up to 100 times their capital after which they will then have $1,000 multiplied by 100 which is equal to $100,000. This will be the amount that a trader will be able to trade with after employing leverage on their $1,000 dollars account. This leverage and ability to trade using borrowed funds is what make Trading popular.
