Forex, or Foreign Exchange, may be the simultaneous exchange of 1 country's currency for that of another. This market of exchange has more daily volume, both consumers, than every other on the planet. Taking place in the major financial institutions around the world, the foreign exchange market is open 24-hours each day.
Currencies are quoted in pairs. The first listed currency is called the base currency, as the second is known as the counter or quote currency. In the wholesale market, currencies are quoted using five significant numbers, using the last placeholder called a point or a pip.
The foreign exchange market is among the most widely used markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of forex may be the high degree of leverage available.
Benefits of forex currency trading
Leverage. Huge leverage will come in Forex trading, often as much as 100:1 meaning that large profits can be generated from small margin deposits.
Liquidity. The enormous size and global trading from the forex markets means that the markets within the major currency pairs are extremely liquid making trade executions almost instant with little slippage.
Capability to go short. Since forex trading always involves purchasing one currency and selling another, there isn't any structural bias to the market. What this means is an investor has equal potential to profit in a rising or falling market.
Trends. Fundamentally, the value of a country's currency is dependent upon interest rates and the strength of the economy in relation to other countries. Currencies, therefore, possess a greater tendency to trend until the fundamentals change.
Disadvantages of forex trading
Leverage. With huge leverage available to forex traders the danger is that positions which carry too much risk for that account size can be taken on, leading to margin calls. Effective money management rules must be adhered to.
Brokers. Retail traders must use a broker instead of dealing directly in the interbank market. The broker would be the counterparty in most transactions and is, effectively, making the marketplace. They are able to, therefore, widen spreads as well as refuse to trade during volatile trading conditions. To prevent dealing with brokers an alternative to forex is by using futures. See futures trading for more information.
Spreads. As the retail trader must make use of a broker to trade, they cannot deal at the interbank rates. An agent will generally quote a fixed spread of 3-20 pips depending on the currency pair. The underlying interbank rate might be as little as 1 pip.
Forex is a very large market however for most retail traders coping with brokers the possibilities shifted against them. Online futures trading supplies a a lot more level arena for many traders who wish to take part in forex currency trading.