Foreign Currency Trading Basics- Education
Forex (Foreign Exchange) is the name given to “direct access” foreign currency trading. With an average daily volume of $1.4 trillion, online foreign currency trading is 30 times larger than all of the futures markets combined and for that reason, is the world’s most liquid market.
In the past, online foreign currency trading was limited largely to huge money center banks and other institutional traders. But in just the past few years, technological innovations and the development of online foreign currency trading platforms has allowed small traders to take advantage of the significant benefits foreign currency trading, a.k.a. foreign exchange, forex and FX trading.
If you are an investor now, or would like to become one, online foreign currency trading has significant advantages over other types of investments.
For one thing, it is remarkably easy to get started. All you need to do is open up a foreign currency trading demo account with $50,000 in virtual capital to start playing around with it and decide if online foreign currency trading is for you. You can begin trading immediately with zero risk, live quotes, live news and the same real time profits or losses as if you were investing in a real online foreign currency trading account. (open a demo account now)
Benefits of Online Foreign Currency Trading vs. other investments
Online foreign currency trading is similar to the futures markets in that investors are able to control large amounts of assets for a relatively small deposit, or margin. As with all investments, without proper risk management, high degrees of leverage can lead to large losses as well as gains. The leverage in online foreign currency trading is greater than a stock bought on margin and a typical futures contract. For a deposit of just $1,000 an investor can leverage $100,000 worth of foreign currency or $100 leverage for every $1 invested. Buying a stock on margin only allows $2 leverage for every $1 invested and a typical futures contract allows around $15 leverage for every $1 invested.
Secondly, because you access the foreign exchange markets directly through an online foreign currency trading platform, you pay zero exchange fees. And like futures, you can roll over foreign currency positions indefinitely. Online foreign currency trading is a 24 hour market that literally follows the sun around the world, allowing you to trade when you want to.
Unlike stocks, there are no restrictions on short selling in online foreign currency trading. Sell or buy-it doesn’t matter which way you play the market when you invest in foreign currencies.
And finally, the huge number and diversity of investors involved in online foreign currency trading make it more liquid than both stocks and commodities.
More Online Foreign Currency Trading Basics
In the online foreign currency trading market, currencies are always priced and traded in pairs. You simultaneously buy one currency and sell the other. Let’s assume you believe the value of the Euro is going to increase versus the US Dollar. You would buy one EUR/USD position. The objective of foreign currency trading is to exchange one currency for another in expectation that the market rate or price will change so that the currency you bought (EUR)has increased in value relative to the one you sold (USD). To lock in a profit you must then sell one EUR/USD to close out or offset the position.
Understanding Online Foreign Currency Trading Quotes
Online foreign currency trading quotes show the first currency in the pair which is referred to as the base currency, and the second currency is the counter or quote currency. The US Dollar is usually considered the base currency for quotes, and includes USD/JPY, USD/CAD, USD/CHF. JPY=Japanese Yen, CAD=Canadian Dollar, CHF=Swiss Franc. This means that quotes are expressed as a unit of $1 USD per other currency quotes pair. The exceptions are the Euro (EUR), Great Britain Pound (GBP) and the Australian Dollar (AUD).
What is the “Bid” and the “Ask” in online foreign currency trading?
As with all financial products, online foreign currency trading quotes include a “bid” and “ask”. The “bid” is the price at which a market maker is willing to buy (and you can sell) the base currency in exchange for the counter currency. The “ask” is the price at which a market maker will sell (and you can buy) the base currency in exchange for the counter currency. The difference between the “bid” and the “ask” is called the “spread”. The spread is how the market maker and the introducing broker are compensated for their efforts.
What are the risks in foreign currency trading?
Foreign currency trading carries substantial risk of loss. Only risk capital should be used in foreign currency trading accounts. Online foreign currency trading occurs in the cash market and not on an exchange.
Opening a live online foreign currency trading account is easy.
Once you have decided that online foreign currency trading is right for you, it is just like learning to ride a bike. You just have to start. Eventually you take the training wheels off (demo account) and ride for real. With foreign currency trading that means putting real money into a live trading account (open a live online foreign currency account), and begin online foreign currency trading for real.
