About Forex Trading
The Forex market is becoming a more and more popular place to trade as it has become more available to non-institutional investors. So what is the Forex market, and how do you begin the process of trading in it?
The Forex, otherwise known as the foreign exchange market, gives people the opportunity to trade domestic and foreign currencies. They can buy one currency or sell another based on either speculation, or in order to complete a business transaction in foreign currencies. Unlike other markets, the FX market is open 24 hours a day, 5 days a week. It closes at 4 pm on Friday afternoon and reopens on Sunday at 5pm. The market is able to trade 24 hours a day because of the differences in time zones and the overlapping of each individual session. For example, the Asian session is open from 7pm to 4am EST, while the European session is open from 3am to 12 noon EST. The Australian market opens at 5pm EST and closes at 2am EST, while the New York session opens at 8am and closes at 5pm EST. During every hour of the day, at least one session is open, allowing for banks and private investors to trade at all hours.
The following are a few terms that a potential trader must know before attempting to understand the market:
- Currency Pair
- The Forex market is a currency exchange. Investors are able to buy and sell what are called currency pairs. The values of currency pairs are the current exchange rates which go up and down based on the economic health of both countries. One popular pair on the currency exchange is the EUR versus the Dollar or the EURUSD. Other pairs include, EURCAD, EURGBP, USDJPY, USDCHF, and many more.
- Exchange Rate
- The exchange rates measure the value of one currency in respect to another, or the present value of a specific currency pair. For example, if the exchange rate for the EURUSD is 1.4321, it would be understood as 1.4321 U.S. dollars equals 1 EUR.
- Forex Broker
- A Forex broker is one that specializes in matching buyers with sellers of various currency pairs. It performs its function like a broker in any other exchange market. There are many online brokers to choose from, some offering charting services and news releases. It is important when first entering the Forex market to do your research on a broker, and trade with a demo account in order to get a feel for the software and system that they run. Brokers are not free. They make money based on what is call the spread.
- Broker Spread
- The spread is the difference between the buy price and the sell price. When you buy a currency pair, the price you buy it at is already higher than the price you can sell it. The difference between these prices goes to the broker. It is important when looking for a broker, to find the lowest possible spreads. It will make trading for a profit a lot easier.
- A pip is the smallest incremental movement of an exchange rate. For example, if the 1.4321 exchange rate mentioned before moves up to 1.4322, it is an increase of 1 pip. The value of that one pip movement varies based on the amount of currency that is traded. If you trade 100,000 dollars of the currency pair EURUSD, a one pip movement is equivalent to 10 dollars up or down.
- Short Position
- When an investor or trader takes a short position, you sell the currency pair and profit from its decrease.
- Long Position
- When an investor or trader takes a long position, you buy the currency pair and profit from its increase.
- The Forex market has become available to private investors because of leverage. Leverage is borrowed money, and is available up to a ratio of 500:1. In other words, if you leverage your broker account 200:1, you borrow 199 dollars for every dollar you have in your account. If you have a 1000 dollar account, you can trade up to 200000 dollars of currency.
- Lot Size
- In Forex trading, investors trade lots. 1 Lot is 100,000 dollars; a micro lot is 10,000 dollars. If the investor has a smaller account, he or she buys and sells micro lots.
The Forex market can be very volatile and can result in great profits. It is important to develop a strong strategy and practice before attempting Forex trading with real money.
Professional advice should be sought regarding all financial services. These can be obtained from financial planners and advisors who can also advise on financing, accounting related matters.