The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
Forex Option Defined – A forex option is a financial currency contract giving the forex option buyer the right, but not the obligation, to purchase or sell a specific forex spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the forex option buyer pays to the forex option seller for the forex option contract rights is called the forex option “premium.”
The foreign exchange market is unique because of
- its huge trading volume representing the largest asset class in the world leading to high liquidity;
- its geographical dispersion;
- its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- the variety of factors that affect exchange rates;
- the low margins of relative profit compared with other markets of fixed income; and
- the use of leverage to enhance profit and loss margins and with respect to account size.
How the forex Market Works
- As forex is all about foreign exchange, all transactions are made up from a currency pair – say, for instance, the Euro and the US Dollar. The basic tool for trading forex is the exchange rate which is expressed as a ratio between the values of the two currencies such as EUR/USD = 1.4086. This value, which is referred to as the ‘forex rate’ means that, at that particular time, one Euro would be worth 1.4086 US Dollars. This ratio is always expressed to 4 decimal places which means that you could see a forex rate of EUR/USD = 1.4086 or EUR/USD = 1.4087 but never EUR/USD = 1.40865. The rightmost digit of this ratio is referred to as a ‘pip’. So, a change from EUR/USD = 1.4086 to EUR/USD = 1.4088 would be referred to as a change of 2 pips. One pip, therefore is the smallest unit of trade.
- With the forex rate at EUR/USD = 1.4086, an investor purchasing 1000 Euros using dollars would pay $1,408.60. If the forex rate then changed to EUR/USD = 1.5020, the investor could sell their 1000 Euros for $1,502.00 and bank the $93.40 as profit. If this doesn’t seem to be large amount to you, you have to put the sum into context. With a rising or falling market, the forex rate does not simply change in a uniform way but oscillates and profits can be taken many times per day as a rate oscillates around a trend.
When you’re expecting the value EUR/USD to fall, you might trade the other way by selling Euros for dollars and buying then back when the forex rate has changed to your advantage.
The forex Trading Systems
While you may be right in being cautious about any forex trading system that’s advertised, there are some good ones around. Most of them both utilize forex charts and by means of these, identify forex trading signals which tell the trader when to buy or sell. These signals will be made up of a particular change in a forex rate or a trend and these will have been devised by a forex trader who has studied long-term trends in the market so as to identify valid signals when they occur.
Many of the systems will use forex trading software which identifies such signals from data inputs which are gathered automatically from market information sources. Some utilize automated forex trading software which can trigger trades automatically when the signals tell it to do so. If these sound too good to be true to you, look around for online forex trading systems which will allow you undertake some dummy trading to test them out.
By doing this you can get some forex trading training by giving them a spin before you put real money on the table.
How Much do you Need to Start off with?
This is a bit of a ‘How long is a piece of string?’ question but there are ways for to be beginner to dip a toe into the water without needing a fortune to start with. The minimum trading size for most trades on forex is usually 100,000 units of any currency and this volume is referred to as a standard “lot”. However, there are many firms which offer the facility to purchase in dramatically-smaller lots than this and a bit of internet searching will soon locate these. There are many adverts quoting only a couple of hundred dollars to get going!
Where do You Start?
The single most obvious answer is of course – on the internet! Online forex trading gives you direct access to the forex market and there are lots and lots of companies out there who are in business just to deal with you online. Be vigilant, do spend the time to get some good forex trading education, again this can be provided online and set up your dummy account to trade before you attempt to go live. If you take care and take your time, there’s no reason why you shouldn’t be successful in forex trading so, have patience and stick at it!
Benefits of the Forex Market
– Superior liquidity
Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with more than 3 trillion dollars traded every day. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.
– 24hr Market
This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.
– Leverage trading
Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position. Remember leverage is like a double sword, it could work in your favor as well as against you.
– Low Transaction costs
Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.
– Low minimum investment
The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.
– Specialized trading
The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (around 80% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.
– Trading from anywhere
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.
All these benefits make the Forex market very attractive to investors and traders. We need to make something clear though, even when all these benefits of the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience.