What is Forex Trading?
Forex, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another. This market of exchange has more daily volume, both buyers and sellers, than any other in the world. Taking place in the major financial institutions across the globe, the forex market is open the full 24-hours a day. Forex currency trading takes place around the world, across the time zones of the globe.
You should know that currencies are quoted in pairs. The first listed currency is known as the base currency, while the second is called the counter or quote currency
In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a pip or the point.
The forex market has become the most popular of markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. A most enticing aspect of trading currencies is the high degree of leverage available.
What are the advantages of forex trading?
Leverage. Huge leverage is available in Forex trading, often up to 100:1 meaning that large profits can be generated from even small margin deposits.
Liquidity. The enormous size and global trading of the forex markets means that the markets in the major currency pairs are very liquid making trade executions almost instantaneous with little slippage. This is due to a great extent to the rapid communication systems that are available worldwide.
Ability to go short. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. This means a trader has equal potential to profit in a rising or a falling market.
Trends. Fundamentally, the value of a country's currency is determined by interest rates and the strength of the economy in relation to other countries. Currencies, therefore, have a greater tendency to trend until the fundamentals change.
What are the disadvantages of forex trading?
Leverage can be a two headed sword. With huge leverage available to forex traders the danger is that positions which carry too much risk for the account size can be taken on, leading to margin calls. Effective money management rules must be adhered to.
Brokers. Retail traders must use a broker rather than dealing directly in the interbank market. The broker will be the counterparty in all transactions and is, effectively, making the market. They can, therefore, widen spreads or even refuse to trade during volatile trading conditions. To avoid dealing with brokers an alternative to forex is to use futures.
Spreads. As the retail trader must use a broker to trade, they cannot deal at the interbank rates. A broker will generally quote a fixed spread of 3-20 pips depending on the currency pair. The underlying interbank rate might be as little as 1 pip.
Forex is a very large market but for most retail traders dealing with brokers the odds are shifted against them. Online futures trading provide a much more level playing field for most traders who want to take part in forex trading.
Forex or Currency trading can be an exciting way to make your fortune. Prepare and understand the concepts and risk factors involved.
Remember that a knife can cut both ways for you or against you .
Ms. Amy Goodmann
Senior Analyst
Substantial Incomes
www.forexforexforexforex.com
frxforex@yahoo.com
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