Fact: The Foreign Exchange Market is the largest financial market in the world!With an average daily trading volume of over $1 Trillion, the Foreign Exchange or "forex" market is easily the largest financial market worldwide. In fact, it is in upwards of thirty times larger than all of the U.S. equity markets combined! While it may sound exotic and mysterious to someone who is not familiar with it, it is actually quite simple once you develop an understanding of how it works. The intent of this article is to introduce you to the Foreign Exchange market and provide you with the knowledge necessary to profit from both long and short term trends in this exciting marketplace. The guide that follows will show you the advantages to trading in the forex market and provide you with the tools you need to be a successful trader.
The Foreign Exchange Market - Currency Trading
The Foreign Exchange Market - Currency Trading
The Foreign Exchange had long been limited to large international banks, import and export companies, hedge funds, and high net worth individuals. The Internet changed all of that and allowed individuals the opportunity to access these markets alongside the professional traders. While the equity markets have enjoyed exponential growth thanks to the spread of online brokerages and mutual funds, the Foreign Exchange or "FX" market has remained a mystery accessible only to a privileged few. The once exclusive world of currency trading is now gaining popularity at a rapid pace with the arrival of reputable online trading firms providing access to retail investors.
Forex trading refers to the "exchange of" or simultaneous purchase of one currency and sale of another. Unlike the equity markets where a security such as Intel (INTC) can be bought and sold at any time independent of other securities, Currencies trade in pairs with prices based on the relationship of one currency to another. The most commonly traded pairs referred to as the "Majors" are the Euro, The US Dollar, Japanese Yen, Swiss Franc, British Pound, Australian Dollar, and Canadian Dollar. Approximately 85% of all currency transactions involve the majors making them the most liquid of all trading pairs and therefore the best suited by individual traders and investors
Forex trading refers to the "exchange of" or simultaneous purchase of one currency and sale of another. Unlike the equity markets where a security such as Intel (INTC) can be bought and sold at any time independent of other securities, Currencies trade in pairs with prices based on the relationship of one currency to another. The most commonly traded pairs referred to as the "Majors" are the Euro, The US Dollar, Japanese Yen, Swiss Franc, British Pound, Australian Dollar, and Canadian Dollar. Approximately 85% of all currency transactions involve the majors making them the most liquid of all trading pairs and therefore the best suited by individual traders and investors
How the Market Works
At first glance, the currency markets can seem confusing or intimidating. One of the most important concepts of the currency market is understanding the structure of the quotes. The most important thing to remember is that the first currency listed in the pair is considered the base currency and its value is always equal to 1. In the following example, we will use the currency pair of US Dollar vs. Japanese Yen expressed as USD/JPY. The US Dollar or USD is considered the base currency. The quote will be expressed as a unit of $1 USD per the other currency, in this case the JPY. A quote of USD/JPY of 110.05 would mean that a single US Dollar is equal to 110.05 Japanese Yen. For those of you who have traveled internationally and dealt with the exchange of currency, this concept will be familiar.
Interpreting these relationships is simple when you remember that a rising quote represents an increase in value of the base currency (The currency listed First in the quote) while a falling quote represents a decrease in the value of the base currency as compared to the other currency listed in the pair.
Just as in the equity markets, when viewing a forex quote you will see two values, one being the "Bid" and the other being the "Offer" which is also commonly referred to as the "Ask". The bid is simply the highest price that a current buyer is willing to pay for the quoted currency at any given time while the offer represents the lowest price that a current seller is willing to accept for the same transaction. The key point to remember is that the offer or ask price is the price at which you can purchase the base currency while the bid is the price that you can sell the base currency at any given time.
This becomes much clearer when you begin to see it in action. Once you participate in some sample trades, it will quickly become second nature and you will be on your way to trading currency like a pro.
Interpreting these relationships is simple when you remember that a rising quote represents an increase in value of the base currency (The currency listed First in the quote) while a falling quote represents a decrease in the value of the base currency as compared to the other currency listed in the pair.
Just as in the equity markets, when viewing a forex quote you will see two values, one being the "Bid" and the other being the "Offer" which is also commonly referred to as the "Ask". The bid is simply the highest price that a current buyer is willing to pay for the quoted currency at any given time while the offer represents the lowest price that a current seller is willing to accept for the same transaction. The key point to remember is that the offer or ask price is the price at which you can purchase the base currency while the bid is the price that you can sell the base currency at any given time.
This becomes much clearer when you begin to see it in action. Once you participate in some sample trades, it will quickly become second nature and you will be on your way to trading currency like a pro.
Learning How to Trade
While this topic could be the subject matter of an entire book of it's own, for the sake of simplicity I will just provide a few tips to help you get started and go into further detail with some additional articles. The best way to get your feet wet and learn how to trade the foreign exchange market is to open what is called a "practice" account with an online forex broker. These accounts are 100% free and don't require you to involve any of your own money to trade. These practice accounts serve as an exact simulation of what goes on in the currency market including streaming prices, charts, and news. The system will allow you to place practice trades and will calculate what you profit or loss would have been on each had it been a real trade. This is a great way to get a feel for the market and refine your trading skills before you put any money at risk. There are plenty of online forex brokers offering this service so you will definitely have the opportunity to shop a few of them and see which one you like best. There is nothing preventing you from opening a practice or "demo" account as they are sometimes called with more than one company. That will allow you to see which one you like better and which one best fits your trading style. You will find that with a little practice, you are able to learn how foreign exchange trading works very quickly. Once you see how the market works and are comfortable with your trading skills, you can open a live account and start trading with real money.
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