Currency Forex Market Trading
by Amanda Harvey
Introduction
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.
In Conclusion
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.
Options traders are not successful because they win.
Options traders win because they are successful.
Back to Types of Traders and Trading
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