Foreign
Exchange (FX or Forex) is the largest market in the world. It is the most
liquid market because Forex traders exchange in average $5 trillion daily.
You might
be asking yourself is Forex the best market for you? If you want a market that
does not sleep, if you want to keep your full-time job and trade in Forex, if
you need to start with a small account and make big profits, then Forex may be
for you.
The
advantage of trading Forex is the opportunity to take large trades with small
amounts of money. The different leverages offered by brokers make it easier for
traders to open a trading account with small capital.
All
transactions in the Forex market involve two currencies. If a trader, a bank, an
institution, or a traveler decides to exchange one currency for another, a
Forex trade takes place.
Thus, one
currency is being bought and another currency is being sold. Currencies must be
compared to something else in order to establish value; this is why Forex
trading involves two currencies.
The Forex
market is a market that does not sleep. It is open 24 hours a day, 5 and a half
days a week, except the weekends. The reason behind this is because
governments, businesses and individuals who require currency exchanging
services are spread around the world and in different time zones. For example,
currency pairs with Japanese yen are most traded when it is daytime in Japan.
However, since there are always counter currencies to complement the pair,
Japanese Yen ends up being traded all day with a spike in activity from 12 a.m.
to 8 a.m. GMT.
Why would
anyone trade Forex? The market is open after 24 hours and traders with full
time jobs are able to trade Forex after work, before work and on Sunday
evening.
Another
reason is the liquidity of the market. The Forex market is the most liquid
market in the world. With most trading concentrated during the New York
Session, for example roughly 70% of all Forex transactions involve the US
dollar, there are always a lot of people trading. This makes it very easy to
get into and out of trades at any time, even in large sizes.
Forex can
be accessible anywhere you go and where there is an internet connection. You
can trade from your computer, your laptop, or your cell phone. The only things
you need are an internet connection and a trading account.
In Forex,
the price of a currency is always determined in another currency. Currencies
are grouped into pairs to show the exchange rate between the two currencies.
If you
plan to visit a foreign country, you must exchange your home currency for the
currency of the country you are visiting. This is a currency transaction. For
example, when a traveler from Paris comes to visit the United States, he must
exchange Euros for U.S. dollars. The traveler is now selling the Euro and
buying the U.S. dollar.
In 2016,
the traveler would have received about $1.11025 in U.S. currency for every
Euro. The exchange rate at that time for the Euro/U.S. dollar was about 1.11025
(see figure 1).
Forex
traders profit from changes in the exchange rate. Traders tend to buy a
currency pair when the price is low and sell it when the price goes up making a
profit or loss. The small changes in the exchange rate when traded in a high leveraged
account, traders can make a large profit.
As a Forex
trader, you need to open a trading account with a broker and start trading the
currency pairs available through the broker’s platform. If you are interested
in trading pairs with U.S. dollar - for example USDJPY (U.S. Dollar/Japanese
Yen), you either buy or sell the pair. When you execute a buy trade you
actually buy U.S. dollar and sell Japanese yen. If you decide to short the
pair, you enter a sell position where you sell the U.S. dollar and buy the
Japanese yen.
The
profit you make from your trades is related to how the pair performs in the
market during a certain period of time. For example, if you buy USDJPY at
114.256 and the market moves to 114.370 you make profit as the market moves in
your predicted direction. But if the market goes from 114.256 to 114.120, you
simply lose money and you need to close the trade because the market is moving
in the opposite direction from what you predicted. By analyzing the market, you
can decide if you are going long or short in a pair based on your technical analysis.
The Forex
market is open 24 hours a day from 10 p.m. GMT on Sunday until 9 p.m. GMT on
Friday. The reason why Forex market is open 24 hours a day is because
currencies are in high demand. Currencies are also needed around the world for
international trades, as well as by central banks and global businesses.
The Forex
market can be split into three main regions: Australia-Asia, Europe and North
America (see figure 2). Within each of these main areas there are several major
financial centers. For example, Europe is comprised of major centers like
London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all
conduct forex trading for themselves and their clients in each of these
markets.
Each day
starts with the opening of the Asian session, followed by Europe and then North
America. As one region's market closes another open, or has already opened, and
continues to trade in the Forex market. Often these markets will overlap for a
couple hours providing some of the most active Forex trading.
European
currencies are most traded from 8 a.m. to 4 p.m. GMT - this is called the
London/European session, and from 12 p.m. to 9 p.m. GMT is the North-American
trading session.
Although
the Sydney, Australia, Forex market opens at 9 p.m. Sunday GMT, it is too
thinly traded, so you could wait for the Tokyo market to open an hour later for
better trading volume.