A Beginners Guide To Currency Trading
While the foreign currency trading market is one of the largest and most lucrative markets globally it does not receive the attention it rightly deserves. Instead, one will find that bonds and stocks markets are more popular despite forex being more profitable. In comparison, the forex market handles more than approximately $4 trillion in trades on a daily basis through currency sales and purchases.
What is foreign currency trading?
Unlike commodities trading, such as futures and forwards markets, forex operates on a virtual trading market. This means the trader will trade with actual currency pairings but no ‘hand to hand’ transactions will take place. The trades take place via several brokers or financial agencies.
Unlike the stocks investment market, the foreign exchange market operates on a 24 hour basis, five days per week. While there is no central exchange, there are major financial centres globally which accommodate the different time zones. These can be found in Sydney, Paris, Singapore, Frankfurt, Zurich, Hong Kong, New York and London.
Due to the improvement in the online forex trading platforms, the option of forex trading is now available to all individuals. In previous years it was dominated by governments and large corporations; however individual traders may now open forex accounts for minimal amounts of money. All you require to engage in online forex trading is a reliable computer and a high-speed internet connection.
The foreign exchange market vs. other markets
The greatest difference between the forex market and other financial markets is that forex deals with trading currencies online. However, there are other notable differences which must be considered.
Firstly, as forex does not trade on a commodities or stock exchange there is no evidence of a central governing body. This means that there is no need for regulation and clearing of the selling party, making trades simpler and faster.
Another factor to consider is there are no brokerage or exchange fees payable in the forex market. Forex brokers earn a commission on the trade spread, this being the difference in the price you pay to purchase a currency and the value your receive when you sell the currency. Furthermore, there is no restriction on the amount of currencies you may trade.
Finally, the most important difference, are the operating hours. As is aforementioned, the forex market operates on a 24 hour basis, five days per week allowing the trader access to trading at any time. The financial markets do not support this feature.
How does a trader make profitable trades?
When placing a trade it is important to determine the value of the currencies, this can be done using a forex converter. The converter is a useful tool which calculates the present currency exchange rate. If the conversion of your base currency into the currency you have purchased is positive, there is a chance of profit. Ideally, at the end of the trade you should convert the foreign funds back into your local currency with more than the amount you started with. This would be a profit. If the converted amount is less than the initial trading amount, this would be a loss.
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