What is Forex trading?

Foreign Exchange trading (also called Forex, FX, or currency trading) describes trading in the many currencies of the world.  It is the largest and least regulated market providing the greatest liquidity to investors.  Forex has no physical location; it operates through the electronic network of banks, computer terminals or via the telephone. The lack of a physical exchange enables Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centres. Forex trading begins in Wellington (New Zealand), then Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Maine, London and then finishes in New York and Los Angeles.

A large part of the forex trading market is made up of currency traders who speculate on movements in exchange rates, much like other investors would speculate on the movements of stock prices. Other participants include central banks, corporations and hedge funds. 

Exchange rates
Forex trading or currency trading is always done in currency pairs, one currency is bought and the other sold.  The first currency in the exchange pair is referred to as the base currency and the second currency as the counter or quote currency.  The value of the base currency is always 1. 

The bid price represents how much will be received in the counter or quote currency when selling one unit of the base currency and is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit

of the base currency.  A currency that is quoted against the US Dollar  is called a direct rate, while any currency not quoted against the US Dollar is referred to as a cross rate.  Currency pairs are generally traded as 100,000 units of the base currency e.g. if you are buying EUR/USD at 1.4512 you would be paying 145,120 Dollars for 100,000 Euros (or 1.4512 US Dollars for 1 Euro).                       

It is normally quoted like this:

This abbreviation specifies how much you have to pay in quote currency to obtain one unit of the base currency. The minimum rate fluctuation is called a point or pip.

The most commonly traded currencies (called the “Majors”) are the US Dollar (USD), the Euro (EUR), the British Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD), the Japanese Yen (JPY) and the Australian Dollar (AUD).  Commonly Traded Currency Pairs are:

Euro and US Dollar (EUR/USD),

British Pound and US Dollar (GBP/USD),

US Dollar and the Japanese Yen (USD/JPY) and

US Dollar and Swiss franc (USD/CHF)

Why trade in Forex?

The main attractions for Forex trading are:

•    Forex can be traded every hour of the day (Monday to Friday) compared to stock markets which are only open during normal business hours.

•    The forex market is an enormous liquid market, making it easy to trade most currencies.  Forex is the largest financial market in the world, with volumes of about $2-trillion per day.

•    It offers great profit opportunities because the markets are so volatile.

•    A trader can profit in both rising and falling markets.

•    Leveraged trading with low margin requirements.

•    Traditionally there are no commissions or charges on Forex other than the spread.

Forex trading can take place in three ways:

•    The spot market

•    Forwards and futures

•    Options

Risk Warning

Under margin trading conditions even small market movements may have a great impact on your account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds you have deposited. You are responsible for all the risks, financial resources you use and for your chosen trading strategy.

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