In the past, forex trading was the preserve of the banks and big businesses, but today anyone can become a forex trader. Forex trading has become the fastest-growing trading industry, with an average of US$2,000 billion traded every single day. This is because it can result in huge profits for investors. Nowadays, all you need is a small sum of money, a computer with a high-speed Internet connection, and an online account with a foreign exchange trading company.
All foreign exchange business is conducted over the Internet, for there is no centralized market place, as there is in the trading of stocks and commodities. This enables the market to be open for 24 hours a day, through five and a half days a week, across all time zones. This makes forex trading an ideal second job, as it can be carried out during the night, or throughout downtime.
What is forex trading?
Currency is an important commodity, and it it this that is being traded in the foreign exchange market. In simplistic terms, someone doing business with a foreign company needs to pay them in their own monetary unit. For example, if a company in the US wants to buy from a German company, they would have to change their American Dollars into Euros to pay the account. Similarly, tourists need to exchange money from their home country, in order to purchase the local currency of the country they are visiting. It is these different monetary units that are being traded, buying and selling in pairs, one currency against another.
A brief overview of the markets
Forex is traded in three ways: the spot market, the forwards market and the futures market. The spot market is the major arena for forex trading. This is the market where currency is bought and sold at that day’s exchange rates. The price is determined by supply and demand, and is influenced by economic factors related to the country to which the currency belongs, such as economic performance, interest rates, and the political situation both within the country and internationally.
Both the forwards and futures markets deal in contracts rather than actual currency. The contracts represent a claim to a particular currency at a given price per unit, and a fixed date for settlement. Both types of contract are binding, although they can be traded before the expiry date.
A forwards contract is made privately between two traders who agree on the buying and selling prices of their currencies between themselves, and the date on which the monetary exchange will be made.
The currency futures market is controlled by a public commodities market, such as the Chicago Mercantile Exchange. These contracts have specific agreed terms that cannot be changed by buyer or seller. When the contract expires, the holder receives the cash in the underlying currency. Day traders, especially, do not want to receive actual currency so these contracts may change hands several times before they expire.
Before you launch into the world of forex trading for real, it is best to find a currency broker and open a demo account, where you can practice trading. You may have to try several brokers until you find one that suits you. Before settling on a broker, it is also good practice to study some online reviews about that particular company, or join a forum. In this way, you will avoid any scams that are out there.
Always remember that this is mainly a speculative market, where dealers might be forecasting how one currency might gain or lose against another currency, and aren’t necessarily interested in taking delivery in cash. Forex trading can be very lucrative for the experienced dealer who can predict the way the market is going to move, although huge losses can also be sustained if important signals are missed. For the beginner trader, it is important to study the market, practice trading, keep a cool head, and not get caught up in the excitement if you are to take on the professionals.