Forex trading, or as it is more commonly known the foreign exchange market, is a global market in which currencies are traded. The trading of currencies is currently the largest market with the daily average turnover in the trillions. Despite these staggering figures, the market is one that continues to grow, aided by high internet speeds and the use of the Internet for online trading. The versatility of FX trading allows traders from around the world, regardless of timezones and locations, to participate in the foreign exchange market 24 hours a day. This is, however, limited to weekdays as the market is closed at the weekend. In the past Forex, or FX, currency trading belonged to the world of financial institutions but nowadays the market is much more accessible with more and more retail Forex traders becoming involved in foreign currency trading. http://newtimezone.com
The Forex market differentiates itself from other markets as there is no centralised marketplace in which trading takes place, instead trading takes place over the counter and thus is decentralised. This decentralisation means that Forex currency trading can take place via a dealer network or brokerage. Some firms will charge commissions on executed trades, whereas others may not and as a result the trader only has to pay the bid/ask spreads. Forex trading differs from equity trading as it’s based on leverage. As a result losses and gains can be amplified. Forex trading also means traders will only have to choose from trading in a few currencies, whereas equity trading involves selecting from a multitude of stocks.
A typical trade on the foreign exchange market follows the pattern of buying a quantity of one currency whilst simultaneously selling a quantity of another currency. The most common currency trading pair is the EUR/USD (the Euro and the US Dollar), and represents the number of US Dollars one Euro can purchase. If a trader believes the Euro will increase in value against the US Dollar, he or she will buy Euros with US Dollars. If the trader is correct in their prediction and the exchange rate rises, the trader will then sell the Euros back and thus make a profit. Of course, if the market exchange rate is less favourable and goes against the traders’ prediction, and depending on leverage, the loss could be substantial. The most opportune time to execute a trade is when the spread (the difference between the bid and ask price) is the tightest between the two prices quoted. A PIP, percentage in point, is the change in price quoted to the 4th decimal point, e.g. if the EUR/USD moves from 1.3230 to 1.3240 it has moved up by 10 pips. Forex traders will closely monitor the spreads in currency pairs and PIP movements to ascertain when to execute their trades.