The Simple Way To Understand Forex Trading

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So what is forex trading?

It is simply the trading of a variety of different foreign currency types. Foreign exchange trading used to be constrained to the bigger banks and institutional traders, but due to advances in technology, small traders can reap the rewards available in the forex markets by using trading platforms online.

The forex markets go by a number of different names: forex exchange, currency market and FX market, and is the oldest financial market, as well as the biggest and most liquid market. For example when compared with the currency futures market, you'll find that the currency futures is one percent the size of the forex markets. Trading on the forex markets is not focused or centred on any single exchange, and moves from all major banking centres across the world.

Each world currency is on a floating exchange rate and the majority of daily currency transactions involve only the major currencies, such as the Euro, the Dollar and the Yen. Also currencies are always traded in pairs. For example, the Dollar/Yen or the Euro/Dollar.

For investments there are only usually four of the major currencies used. The US Dollars against the Swiss Franc, The US dollar against the British Pound, the Euro against the US Dollar and the Japanese Yen against the US dollar. On the trading markets they are represented in the following format:

- EUR/USD
- GBP/USD
- USD/JPY
- USD/CHF

You should also be aware that dividends are not paid on currencies

Basically if you think that one currency will appreciate (or gain) against another currency, you can exchange the first weaker one for the first and hold it. Providing all goes to plan, you will eventually be able to change the first currency back to the second and reap the profits made from the currency exchange differences.

So when are the forex markets open?

The forex markets are open 24 hours a day 7 days a week, dealers work in 3 different shifts taking orders from brokers to execute overnight. So when you are asleep in your bed the dealers in Japan are busily trading with the dealers in Europe.

Unlike the stock market the movements in price on the forex market are smooth and don't experience the same gaps and jumps when the stock markets open each day. The turnover each day on the forex markets is over a staggering $1.2 trillion, so investors are constantly entering and exiting their positions within the market place.

Recently the market has opened up to small investors. Previously the barrier to entry was significant due to large minimum transactions sizes and stringent financial requirements. Only the banks and big currency dealers were the main players in the market, as they were in a position to take advantage of all the benefits the forex market offers.

Brokers now break down the large inter-bank units, thus allowing smaller traders to buy and sell within the forex market place, taking advantage of the amazing liquidity and profit potential. The brokers, give you the opportunity to trade at similar rate and price movements as the big banks who used to have a monopoly on the market. The key for any new forex trader is to have a forex trading plan or strategy to follow to help negate the risk and potential for huge losses, and to maximise the chance of success.

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