What is traded in the forex market? The simple and straight forward answer is money. Forex trading is the simultaneous buying of one currency and the selling of another.
Currencies are traded through a broker or dealer like EToro, and are traded in pairs; for example the euro and the US dollar or the British pound and the Japanese Yen.
The Forex market is considered an Over-the-Counter or 'Inter bank' market. This is due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Until 1990, the minimum requirement to open a forex trading account ranged from $ 10 million - $50 million. It was only intended to be opened for bankers and large financial institutions. Due to the rapid growth of internet, now these large financial institutions are offering retail accounts to us.
Foreign Exchange Trading is simply the purchase and sales of currency based on the strength of the currency and the fluctuation in the value of that currency. For example, if one were to invest $1,000 against the British pound at 1.7999 with a 1% margin and anticipate the exchange rate to climb. If that occurs and you close the exchange rate at 1.8050 you would earn roughly $400. Forex is giving you a 40% return on your investment.
Forex offers the possibility of huge profits in relatively short periods of time. The stock exchange is very different in that positions are generally maintained over a longer period of time. Although there are day traders, Forex traders have much shorter hold times on positions. Similar to the stock market marginal accounts can be obtained in the Foreign Exchange Market as well.
Forex marginal accounts are very engaging as they allow Forex traders to take large positions without having to make a large deposit. In many circumstances one can fund a marginal account with .05% the necessary funds. In other words, $500 would allow a $100,000 position. In order to trade Forex effectively and profitably, one must have some type of method to follow. There are two methods used in determining what Foreign Exchange trades one should make. There are two methods, fundamental Forex analysis, and technical Forex analysis.
Each nation's currency has an exchange value compared to other currencies which fluctuates in response to market forces. Currencies are traded in pairs. A good example is the US dollar/Euro pair, which is the largest volume currency pair. You'll see it quoted as EUR/USD
1.3755 meaning at the time of the quote it cost $1.3755 to buy one Euro. The foreign exchange market exists to allow businesses, financial institutions, and governments to quickly and easily move funds from one country to another. However, traders hoping to make money off changes in exchange rates account for 80% of Fores trading volume.
History
The modern Forex market had its beginning in 1971 when fixed exchange rates were abandoned and currencies were allowed to float against each other, a step taken to make international trade more flexible. International trade combined with the growth of the Eurodollar market (US dollars deposited in non-US banks) created a$70 billion a day market in the 1980s. The advent of electronic funds transfers in the 1990s opened the door to speculative trading and rapid growth. By 2004 Forex trading reached nearly $2 trillion a day and passed $3 trillion daily in 2007.
Function
Like other securities transactions, Forex is based on a "bid/ask" system. A buyer stated a bid and a seller an asking price. The difference, called the spread, is small. for wholesale dealers it is often no more than $.0001 (this is the smallest possible change in price and is called a pip). Retail dealers mark the spread up to 3-20 pips and keep the difference, instead of charging commissions. In forex trading the goal is to correctly anticipate the direction (up to down) of a currency exchange rate and hope the change is greater than the spread. If that happens the trader makes a profit.
Risks
Forex trading is done with extremely low margin requirements. This is the source of the high profit potential and high risk. The ratio of currency value to the margin requirement is usually 30,100, and up to 400 to 1. In other words, in Forex trading you can "buy" a lot of $100,000 of a currency with as little as $250 cash. The rest is borrowed from the currency dealer. With such extreme margins, even very small changes in currency exchange rates spell the difference between a big profit and losing all of the money you put up.
Considerations
Currency exchange rates change in response to economic factors such as a nation's monetary policy, balance of trade, inflation rate, and breaking news. Market trends driven by trading also influences exchange rates. Before you attempt forex trading, you should educate yourself about these market forces. The Forex market is unregulated, so it's wise to choose a dealer who is a member of a self-regulating body the National Futures Association.
