by Amanda Harvey
Currency forex market trading involves the buying and selling of currencies on the foreign exchange market, commonly known as the “Forex”. Forex trading uses ‘currency pairs,’ which compares the rate of one currency against another. Depending on the fluctuations in exchange rates, a trader will either buy or sell a particular currency pair, in order to profit from the change in rate.
The foreign exchange market is a decentralized global market which operates 24 hours a day, and is conducted through financial institutions. The forex market dominates the world’s trading scene, and generates a volume of around 3.2 trillion US Dollars a day.
How Is Currency Forex Market Trading Conducted?
Forex trading is usually conducted through a broker, and entails buying a certain amount of one currency for a specified amount of another currency. This transaction can be shown with a quotation which includes the currency pair and the rate of exchange.
GBP/USD 1.54965 is an example of a forex quotation. GBP is the British Pound and USD is the US Dollar. In this quotation, a trader can buy 1.54965 US Dollars for 1 British Pound. With this example, the British Pound is the base currency and the US Dollar is the counter currency.
What Are the Main Currencies Traded?
The main currencies traded on the foreign exchange are the US Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Australian Dollar (AUD), the Canadian dollar (CAD), and the Swiss Franc (CHF).
Currency forex market trading uses currency pairs, and the most commonly traded pairs in the world are known as ‘majors.’ These currency pairs are EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD, and they account for around 85% of forex trading. The current rates for the majors are readily available online.
Benefits and Pitfalls of Currency Forex Market Trading
Many traders enjoy the flexibility of around-the-clock trading which accommodates any location and time zone. The forex market is also a very liquid market as it is so actively traded on a world-wide basis.
Forex trading is highly accessible and there are many tools available to help traders succeed. There is a plethora of brokers offering online forex trading platforms to choose from and many of them don’t charge commission. If commissions are not charged, the trader only pays the bid/ask spread, which is difference in price between the highest price that a buyer is willing to pay and the lowest price at which a seller is willing to sell.
It is possible to start trading forex with a small amount of capital. There are many forex accounts available that can be opened with around $100USD, and there are even brokers that offer accounts with as little as $5. However, starting to trade forex with such a limited amount of funding does not allow for any flexibility, and a general consensus seems to be that $300 would be a more realistic minimum starting point.
Forex can be traded on margin, which can be an advantage, but also a greater risk. Trading on margin basically equates to the trader borrowing money from their broker in order to make larger trades than what they could with their own capital. The margin required from the trader can be as little as 1%, which means that they are placing their trade with 99% borrowed money. While this can be great if the trade is successful, it can also be disastrous if the trade fails.
For individuals wishing to participate in a highly accessible, flexible, liquid and popular form of trading, currency forex market trading presents such opportunities. Understanding the benefits and the risks of forex trading allows a trader to make the best possible choices, including selecting a broker, deciding whether to trade on margin, and identifying which currency pairs offer the best potential for profit at any given time.