Forex trading (also known as foreign exchange, FX or currency trading) is a decentralized global market where currencies are traded. It has a daily trading volume of more than $5 trillion, making it the largest and most liquid market in the world. There are tens of currency pairs, which can be divided into majors (most actively traded currencies), minors (less heavily traded than the majors with more fluctuations) and exotics (rarely traded currencies).
Exchanging Your Currency
Without realizing it, you have probably traded in currency. Any time you go overseas or make a transaction online at an overseas site, you can be converting your currency to another currency. The exchange rate is determined by supply and demand for those currencies and this rate fluctuates all the time. When you, as an individual, exchange your dollars for pounds or any other currency, the small fluctuations in the exchange rate will not make a significant difference. However, the more currency you exchange, the more difference it will make. A large international company that needs to pay their employees overseas will feel small fluctuations in the exchange rate and this is where currency trading comes in.
Trading in Currency
Any time you hold onto one currency in the hopes the exchange rate will become more favorable, or you sell a currency because the exchange rate is in your favor, you are essentially trading in currency. Because the market is so large, there are always buyers and sellers. Traders will speculate on the way a currency will move based on many factors, including politics, a county’s economy, natural disasters and more. For this reason, forex traders need to keep their fingers on the pulse all the time. Currency trading is always quoted in pairs. For example, USD/GBP. In this case, USD is the base currency and is the one you speculate will go up or down against the second, quote, currency.
When trading forex, you will take either a long (buy) or short (sell) position based on whether you think the base currency will go up or down compared to the quote currency. For every point, or pip, that the base currency strengthens against the quote currency, you will make a profit.
The Attraction of Forex Trading
Forex trading has become an increasingly popular option for people due to the many advantages it offers. Being a global market is operating from the time it opens in Australia to the time it closes in the US. This means that you can trade at any time it suits you. Being such a large and liquid market leads to price stability, as well as the advantage that there will always be buyers and sellers. In addition, it means that no single entity can control the market price for any significant period. Leverage, which is available in forex trading, allows traders to use small deposits to control large amounts. While there are popular currency pairs, there is a wide range of markets, giving traders many options.