The chances are good that most casual investors have, at some point or another, heard the term “Forex trading”. Many others are well aware what the term “forex” means, but simply had no idea that currency could be traded in similar fashion to stocks and bonds. With that in mind, we’ve decided to create this brief primer which should, hopefully, illuminate some of the more complex concepts and ideas within the forex marketplace.
At its most fundamental level, forex trading involves offering a single unit of a currency, be it the British Pound, US Dollar, etc., in exchange for a unit of a differing national currency. Be-fore these currencies are traded, a price is agreed to at which the units will be exchanged. Like bonds and stocks, currency is traded in a variety of marketplaces all over the world. What you may not have known, however, is that forex trading is by far the most heavily trad-ed market in the entire world. In fact, the estimated value of all daily forex transactions is ap-proximately $5.3 trillion.
The forex markets were created largely to facilitate international trade. In the era before the Euro, European forex trading was a highly active marketplace. Today, forex remains a hive of activity even with a common currency among the bulk of European nations. Savvy trad-ers attempt to speculate how future prices for currency will be affected by various parame-ters, be it political turbulence, economic news or other influential forces. Just like the tradi-tional stock market, the goal is to earn a profit by buying a currency at a low price and selling it when it is valued much more highly.
One of the primary distinctions between the forex marketplace and the more traditional stock markets is that forex trading occurs 24 hours a day, 5.5 days a week. This is due to the fact that there is no centralized trading hub for the forex market. Every forex transaction taking place today occurs through a sophisticated computer trading system. Although this may sound somewhat unreliable, it’s important to remember that these systems are used by countless professional traders on a daily basis. Believe it or not, there are no physical forex exchanges in existence!
Given the fact that only small changes seem to occur in the price of various curren-cies, forex traders often engage in extensive leveraging to maximize their profits. Leveraging can be thought of as borrowing large amounts of capital in order to engage in massive trans-actions within the forex marketplace. If you are trading through a large brokerage firm, it’s not uncommon for 1000:1 leverage to be offered to those interesting in taking it. That being said, it’s important to remember that, while leveraging offers the possibility of big gains, it can also result in crippling losses!
Although this may sound like a unique and exciting world, it’s important to remember that forex trading can be an unforgiving world for novices. Before beginning your pursuit into forex trading, it will well be worth your time to properly educate yourself in the fine workings of this sophisticated system. Without this knowledge, you may find yourself out of luck and out of cash!
Fortunately, a variety of powerful forex trading platforms are available for those who are willing to take a step forward and venture into this fascination world. In fact, many forex simulators are also available for individuals who would prefer to test their strategies with fake currency before investing their own funds. Best of your luck with your adventures into forex trading!