Foreign exchange trading is the buying and selling of one currency in order to buy another. Foreign exchange trading is a market where currencies are traded. The foreign exchange market is the largest financial market in the world with an average daily turnover of over $5 trillion per day. The foreign exchange market can be divided into two categories: spot forex and forward forex. Spot forex refers to transactions that take place on the same day, while forward forex refers to contracts that are made for later delivery dates.
Foreign Exchange Trading
In foreign exchange trading, investors rely on rising or falling exchange rates. The exchange rate determines how much of a currency is needed to buy another currency. Price changes in forex trading are expressed in pips and the unit of trading volume is a lot. Forex transactions are made when banks, trading companies, central banks, mutual funds, and private investors buy, sell, exchange, and speculate with currencies.
Until the turn of the millennium, global foreign exchange trading was only available to professionals, i.e. banks and institutional investors such as hedge funds. In the meantime, however, private investors can also participate in the trillion business.
How to make money in forex trading?
Here is an example. You buy a EUR/USD at an exchange rate of $1.1355 and a few hours later sell the pair at 1.1389. Then you made a profit of $0.0034, or 0.3 percent. That’s probably more than the bank is currently paying you in interest each year.
The chances of profit and the risks of loss in forex trading become clear when you know that the transactions can also be carried out with a leverage of up to 500. In this way, you can multiply your earnings – but also leverage them down significantly (more on this below).
Before you engage in forex trading, you should have some experience. Note that exchange rates are unpredictable which can highly affect the way you trade.
Who Offers Forex Trading?
Foreign exchange is not traded on a central stock exchange, but exclusively electronically on the so-called OTC market (“Over the Counter”). While the banks are networked with each other, private traders need a forex account to trade foreign exchange. Specialized forex brokers and high leverage forex brokers offer their intermediary services with trading platforms.
What Fees Should Forex Traders Expect?
The Forex broker earns on the spread between the bid and asks the price of a currency pair. In trading one speaks of bid and ask prices. Due to the high level of liquidity in forex trading, these ranges are usually quite narrow, usually set to the fourth decimal place. The range (spread) depends on the currency pair, the liquidity, and the degree of fluctuation. The more frequently a currency pair is traded, the narrower the spreads.
The margin usually also covers the transaction costs that are due with every purchase and sale. They are lower than in stock exchange trading with shares or derivatives.