What is Forex Trading?

Foreign Exchange (forex) is the simultaneous buying of one currency, and selling of another currency. Daily volume in the currency market exceeds $1.4 trillion, making it the largest and most liquid market in the world. Unlike other financial markets, the forex market has no physical location or central exchange. It is an over-the-counter market where buyers and sellers including banks, corporations, and private investors conduct business. Foreign exchange trading takes place in financial trading centers all over the world, including New York, London, and Tokyo creating one cohesive, international market. The huge number and diversity of players involved make it difficult for even governments to control the direction of the market. The unmatched liquidity and around-the-clock global activity make forex the ideal market for active traders. Traditionally the forex market was only available to larger entities trading currencies for commercial and investment purposes through banks. Now, specialized Forex trading platforms allow smaller financial institutions and retail investors access to a similar level of liquidity as the major foreign exchange banks, by offering a gateway to the primary (Interbank) market.

Buying/Selling:

In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.

Quoting Conventions:

The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar, as the world’s dominant currency, is usually considered the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions are the Euro, Great Britain pound, and Australian dollar. These currencies are quoted as dollars per foreign currency.

As with all financial products, FX quotes include a "bid" and "ask". The bid is the price at which a market maker is willing to buy the base currency in exchange for the counter currency. The ask is the price at which a market maker will sell the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread.

In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip. In forex, like any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

By quoting both the bid and ask in real time, the Recommended Forex Brokers listed at our site ensures that traders always receive a fair price on all transactions. For other commodities where traders must request a price before dealing, brokers have the opportunity to check a trader's existing position and 'shade' the price (in their favor) a few pips depending on the trader's position.

Margin:

The margin requirement allows traders to hold a position much larger than the account value. The Recommended ForEx Brokers listed on our site provides online trading platforms that have margin management capabilities, which allow for this high leverage. The trading platform performs an automatic pre-deal check for margin availability, and will only execute the deal if the client has sufficient margin funds in his or her account. The Forex Broker's systems also calculates the funds needed for current positions and displays this information to clients in real time. In the event that funds in the account fall below margin requirements, the ForEx Brokers will close all open positions. This prevents clients' accounts from falling below the available equity even in a highly volatile, fast moving market.

Rollover:

In the spot forex market trades must be settled in two business days. For example, if a trader sells 100,000 euros on Tuesday, the trader must deliver 100,000 euros on Thursday, unless the position is rolled over. As a service to traders, Forex Brokers automatically roll over all open positions i.e. swaps the trade forward to the next settlement date (two business days) at 5:00 PM New York time. The swap rates are determined at the Interbank level and are tradable instruments. In any spot rollover transaction there is a difference in interest rates between the two currencies that will be reflected in the overnight loan. If the trader is long the currency with the higher interest rate in the pair, the trader should gain on the spot rollover through the premium relationship of that currency relative to the short currency. The amount of the gain is determined by the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices. For instance, on any given day, the rollover can be $2 per lot for USD/JPY and $15 for GBP/JPY. Rollover fees are usually shown in dollars, and are posted in Forex Brokerage Accounts every day, usually by 3:00 pm New York time. For day traders that never hold a position overnight, rollover will not affect trading.


What Every Currency Trader Should Know:

The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. The Forex Brokers Recommended at our site usually allow positions to be leveraged up to 100:1. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders suffer losses, speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one's personal financial well being.