The Forex market is huge, and is actually larger than the New York Stock Exchange (NYSE). It is so big in fact that it is almost 50 times larger than the NYSE! While the NYSE trades $50 billion dollars in volume daily, the forex market trades between 2 to 3 trillion dollars worth of currency per day! There are no external controls on the Forex market, since it is based on supply and demands of currency. The main purpose of the Forex market is to trade one country’s currency against the currency of another country. Here is a further explanation:
As an example, when trading the Euro against the Dollar, a currency pair is bought, and that represents how many Dollars (US), that one Euro is presently worth. Forex markets are intangible. Unlike other markets, such as the NYSE, where there is an actual building with traders yelling and conducting trades on site. Forex is an Over-the-Counter (OTC) market, and banks and brokers is where it is run through. There isn’t any centralized exchange, unlike other commodity markets. Due to the constant fluctuation of currency values, a Forex trader attempts to make a profit by taking advantage of the movements of values.
Currencies Around The World
Even though most currencies around the world are tradable, the majority of Forex volume is made of these most popular currencies:
- Dollar (USD) – United States
- Dollar (CAD) – Canada
- Dollar (AUD) – Australia
- Dollar (NZD) – New Zealand
- Euro (EUR) – European Union Members
- Yen (JPY) – Japan
- Pound (GBP) – Great Britain
- Franc (CHF) – Switzerland
The abbreviation of Currency is shown in 3 letters. The first 2 letters shows an abbreviation of the country, while the third letter denotes the currency of the country. For example, the United States shows (USD), “US” represents United States, while the “D” represents the currency of the United States which is the Dollar.
The most basic idea of trading in the Forex market is learning how to read a Forex quote. When investing in Forex, quotes are what a trader looks for when deciding when to invest. The charts show what has happened in the market, and this is the Forex quote. The bid and the ask price make up the Forex quotes. The market maker shows what they are willing to buy the base currency at. This is at the base currency exchanged for the counter currency, and is called “the bid”. The price at which the market maker is willing to sell the base currency for the counter currency is called “the ask”. The “spread” is the difference between bid and ask price.
Stock exchange quotes, and Forex quotes are different, and can at first be difficult to understand when first starting out in foreign exchange market trading. The first step in your Forex trading career is to learn how to read the quotes provided by the exchange. Forex quotes vary from broker to broker but are generally very close between each brokerage. Often, the difference in the quote between multiple brokers is the result of the spread, or the difference between bid and ask prices.
Forex Market Types
The three Forex markets an investor can trade currency in are: the futures market, the forward market, and the spot market. The futures market is popular since it enables an investor to hold a particular currency longer. A spot market is based on the current price of the currency. The Forex market never closes. You can basically trade currency any time, day or night. Since the advent of the internet, you can pretty much guarantee that there will be a broker somewhere willing to assist you in conducting a trade ’round the clock.
Advantages & Disadvantages:
There are many advantages of trading in Forex. A Forex trader can make a lot of money. The market is very flexible, with few external controls. A Forex trader can trade pretty much whenever they want, instead of trading only when the market is “open”. A major disadvantage of Forex trading is the possibility of losing a great amount of money, quickly. Also, there are many Forex scams, and a Forex trader needs to do plenty of research before deciding to open a Forex account.
- Open during the work week, 24 hours a day, a trade can be made.
- Open positions can be maintained for a period of time the trader desires.
- Most normal fees of other markets are saved. The broker is paid through the bid-ask spread, (the difference between the bought and sold price).
- High leverage. A Forex broker gives investors the ability to control a large trade with a small amount of money.
- Demo, or trial accounts can be set up to practice before actually trading real money.
- Less manipulation and other influences by traders, due to the large volume of transactions, and the volume of participants.
- High speed, great liquidity due to Forex transactions being traded quickly online.
- Forex can be risky. A Forex trader trading on leverage has the ability to lose larger amounts of money than in other investments, especially with the currency markets fluctuating so quickly.
- Multiple Forex scams. Many Forex traders get duped, and lose large amounts of money due to unscrupulous brokers, and other online trading scams.
Plenty of Choices
Forex trading can be exciting, especially as the market continues to evolve. Before trading in Forex, it is always recommend to open a ‘Demo’ account, and see if Forex is right for you.