The Basics Of Forex Trading

Forex trading in simple words is buying and selling money. The traditional forms of currency exchange involved exchanging moneys of different countries between friends and relatives who were going to other countries and if the other person had that currency. The person who lent the money could be in for a profit if the rate at which he bought the currency was lesser than the rate at which he lent it. These days, trading currency is not so simple. It involves more complicated and high-tech ways. First, you need to open an account with a forex broker and then you can start trading online. This trading is done through a broker or market maker.

Features

One of the prominent features of this money exchange is that once you open an account, you can trade from any place in the world with any types of currencies. The automatic “credit” system is such that you could earn tens or hundreds of times than your investment with currency trading. This trade is the largest financial market in the world. Currency exchange happens between multinational banks, corporations, currency speculators, governments, and central banks. The amazing thing about this trade is that hardly any hard cash is exchanged. You can start placing orders with a broker almost instantly who passes the orders in an Interbank market. He does this to open your position. Once you close your trade, your position is also closed and your account is credited with profit or loss. All this can happen within a matter of seconds without exchanging any hard cash.

FX trading can be done any time of the day. It takes place over three continents. However, its main disadvantage over the stock market is that it offers a low commission. In fact, the commission is lower than any other financial market. This is because unlike the stock market, the forex market offers different levels of access and therefore different commissions. The largest investment banks get the largest share of commissions because with them the difference between bid and ask prices is small. The bid price in foreign exchange is the price at which a client sells a unit of the base currency. The offer or the ask price is the price at which the client purchases a unit of the base currency. There is an inverse relationship between the volumes of trade and the spread. After the top banks, the spread is divided into small investment banks, big MNCs, retailers, pension funds, and insurance companies.

Things to Remember

Before anybody starts trading, he should remember that forex trading involves high stakes and big amount of money. This market is largely manipulated by big banks. Even governments step in sometimes and this affects the price. The Forex market is largely influenced by demand and supply. When the demand is high, the prices rise and vice versa. Electronic and algorithmic trading is gradually spreading in the FX market. Some most traded currencies are the US dollar, the British pound, the Japanese yen, and the Eurozone euro. A person should never expect instant success in currency exchange. This trade requires knowledge, experience, luck, and patience.

This is also true that people have written their success stories with forex trading. They have been earning more in one month than people earn in a year.