Commonly known as forex trading, currency trading refers to the purchasing and selling of the world’s currencies with the objective of making profits. Unlike stocks or commodities, currency trading does not take place on a regulated exchange and it is not controlled by any central governing body. Instead, forex is an over-the-counter (OTC) market where currencies are traded in financial centres around the globe, such as New York, London, Frankfurt, Tokyo and Sydney. This means the market is open 24 hours a day, with the exception of weekends, giving you the opportunity to trade around the clock.
Currency traders include governments and central banks, commercial banks, other financial institutions and institutional investors, commercial corporations, currency speculators and individuals. Financial centres around the world function as anchors of trading between this wide range of multiple types of buyers and sellers. Trades between the market participants can be extremely large, involving hundreds of millions of dollars.
The forex market assists international investments and trade by enabling currency conversion. For instance, it allows a business in the European Union to import goods from the United States and pay in the US dollars, even though its income is in euros.
Currencies are always traded in pairs. For that, the forex market does not set a currency’s absolute value. Instead, it determines its relative value by setting the market price of one currency if paid for with another. For example: 1 EUR is worth X USD, or GBP, or CHF.
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the “bid/ask spread“.
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea).
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage and all will be explained later.
A 24-hour market
There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
No one can corner the market
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on. While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade.
You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order)
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