What is Forex trading

Forex trading has gained in popularity as the economic upheaval has resulted in investors looking for another source of investment and profit. However, there are many investors who have never heard of Forex and have little to no understanding of what it is or how it works.

Forex Basics

Forex stands for “foreign exchange” and involves computerized foreign currency exchange from around the world. It is the largest market for investors and speculators in the world and results in trades totaling over $3 trillion daily. Trade markets are in London, Frankfurt, New York, Sydney and Tokyo. As a result of the revolving worldwide trading system, the Forex market is a 24/7 process.

Codes

Currencies are noted by a three letter code. For example, the United States dollar is noted by USD, the British pound by GBP, the euro by EUR and so forth.

A “cross” is a combination of two currencies that are being compared for exchange rates. For example, GBPUSD notes one British pound to the number of United States dollars. So GBP=1.6768 means that one British pound is equal to $1.68 United States dollars. As the rate changes, the computerized display is shown in bold to indicate a shift in rates.

Rates are displayed in five digit numbers; for example, 1.6768.

Terms

Ask – the desired trade rate for a seller.

Bid – the offer from a buyer.

Spread – the difference between the ask and the bid.

Pip – the smallest unit in which a currency rate can change, for example, a change of 1.6766 to 1.6769 would be a three pip change (6 to 9).

Benefits of Forex Trading

There are several benefits to using
Forex trading for investors and speculators. The Forex market is open 24 hours a day, 7 days a week because it is an international market.

Also, it offers immediate liquidity for speculators. There are always currencies to buy and sell and large players provide the short term lending necessary between banks to allow the currency exchanges to take place. This allows for a constantly shifting market that is both relatively stable and liquid.

For currency speculators who closely watch currency trends, there is tremendous opportunity for profit if a particular currency is rising or falling. The goal of all market speculation is to buy low and sell high. Just as in the stock market, close market watchers will notice if a currency is beginning to fall and sell those currencies when they are at the top of their value. In contrast, when a currency is beginning to gain in value, then buyers will attempt to buy that currency while it is still relatively low so that they can turn around and sell it when it begins to fall again. It is this constant shifting of the market that allows for profits on either end of the shift for close market watchers.