Foreign exchange (Forex) trading is a multi-billion dollar business that is conducted round the clock throughout the world. Ye very few people really know much about it. It is less known and understood compared to its cousins such as stock and bond trading. However, Forex trading an be very lucrative and can serve multiple purpose in your business. Before you jump into it, though you should make sure to educate yourself and understand the nuances. You can start by looking at some of the common questions associated with forex trading as discussed below.
What does forex even mean?
Forex is an abbreviation for “foreign exchange.” You will also see it abbreviated as FX. This is the foreign exchange market where all foreign currencies are traded. The FX market is the largest in the world, and trillions of dollars are exchanged every day.
Where is it located?
Unlike Wall Street, there is no central location for trading in the forex market. Trading happens electronically between banks, brokers, individual traders, and other financial institutions. As one might guess, large forex marketplaces are located in global cities with strong financial centers, including Tokyo, Hong Kong, Singapore, Sydney, New York and London.
When is this market open?
Thanks to the global nature of the market, it is open 24 hours a day 5 days a week. Currencies are traded at all hours because when one market closes for the day another is just getting started.
Who can trade in the forex market?
Historically, foreign exchange trading was limited to large corporations and governments. That is no longer the case. Thanks to the power of the digital age, anyone can trade, and it only takes the click of a mouse. However, there are three major players in the FX market: banks, investment and portfolio managers, corporations and investors.
- Banks can facilitate trades for their clients or for the bank itself. Central banks represent their native governments and are huge players in the FX market. Central banks’ behavior affects their nation’s currency. They use strategy to strengthen or weaken their currency during trading.
- Investment managers and portfolio managers trade currencies for large accounts like pension funds or hedge funds.
- Corporations that do business internationally will use forex trading to exchange currencies that help their business transactions.
- Individuals make up a much smaller portion of the FX market but individual forex trading is growing in popularity.
What is being traded?
When you hear foreign currency trading you mike think about what happens when you travel and you exchange one currency for another. That is different and is done for an entirely different purpose. Unlike traveling when you need the paper money to purchase food, services or entertainment, with forex trading, no physical money is actually traded. Forex trading is done in pairs. For example, the euro versus the dollar, or the yen versus the euro. When you buy one currency you have to sell the other and vice versa. You are taking a position that one currency rate will strengthen and the other will fall. If your position is correct you make a profit.
How do I get started?
You will need help from an investment firm, bank or a forex broker to get started. Brokers can walk you through the process and help you get used to the FX market. Many even offer demo accounts so you can practice before you use actual money. You can visit sites like FX-List.com to begin searching for the right broker. This site is a comprehensive directory of forex brokers and brokerages all across the globe. You can quickly search for a broker that meets your parameters. Other investors leave reviews so you can pick a brokerage with a strong reputation. Remember, the FX market is not regulated, so commissions and fees can vary greatly. Do your homework before selecting a broker.
Is forex trading for me?
It is difficult to say. Forex is different from stocks and you can’t base your future FX success on your history with stock trading. What both have in common, though, is the need to do your homework. Investing requires patience and analysis, and trading currencies is no different. Start small, get your feet wet and pay attention. Before you know it, you may be a successful trader in the world’s largest and most liquid financial market.
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