Forex Trading: The FX Factor

Forex trading, or Foreign Exchange, is the exchange of a country's currency for that of another. Speculators in the FX market want to buy or sell a currency for another with the desire of making a profit when the value of the currency changes in favor of the investor. The Foreign Exchange Market, also referred as Forex market or FX market, was established between 1971 and 1973. Various central banks around the world introduced a free exchange rate regime allowing the currencies to fluctuate as driven by the market. The main participants of the market were Central banks, corporate banks and large institutions and today the Forex trading market has become the world's largest financial market, with over $1.9 trillion USD being traded on a daily basis.

Forex became available to retail investors through on-line trading platforms and leverage. Forex market is a part of the bank-to-bank currency market which is known as the Inter-bank market. In the Forex Market, the money is bought and sold freely; This is the exchange of one currency over another. Over 80% of the overall volume is traded in seven major currencies: the US dollar, the Euro, the Japanese Yen, The Swiss Franc, The Great Britain Pound, the Canadian dollar and the Australian dollar. The exchange rates of all currencies are permanently changing under the effect of demand and supply alteration. There is however no physical location, where all the volume is traded at. This is called an Over the Counter (OTC) Market, due to the fact that all transactions over the world are conducted via telecommunications (phone, on-line platforms, etc).

In the recent years, the evolution of the internet potentiality enabled the Forex traders to trade with automated systems through the internet network. This in turn attracted many other traders to start their controlled online Forex trading business. There are four types of Forex market and the same are: Spot Forex Market; Forward Forex Market; Forex Futures Trading; & Options Forex Market. Spot currency spot trading is the most popular currency instrument all over the world and makes about 40% of the total activity of Forex trading. It means a bilateral contract between two parties to sell-buy two currencies under a contract which is based on the agreed exchange rate within 2 business days of the contract time.

After having a deal, the bank of the trader tells the other party about its quota which is the difference between the bid price and the ask price or sell-buy price. This is usually termed the spread and is measured in points (pips). Going forward, the spot market is characterized by the high liquidity and high volatility; wherein Volatility means the degree of fluctuation of the price of a currency within a certain time. In Forward Forex Market, there is no norm with regard to the settlement dates which range from 3 days to 3 years. There is also a swap deal which is a combination of a spot deal and a forward deal. The total forward forex market represents $ 900 billion i.e. about 55% of the estimated daily gross turnover of $ 1.5 trillion.

The Forex Futures Trading is an attractive kind of Forex which is open to all. The trading house behaves as the buyer for any seller and also acts as a seller for every buyer. This is why Forex Futures Trading has attracted a large number of players. They are derived from the spot price. The Forex Futures Trading is a central Forex market and it is as efficient as the decentralized cash market where the trading takes place under one roof. The futures deals are specific types of forward outright deals. They are specific in relation to the expiration date and also the size of the trade amount. They mature on any valid date in the 2 countries whose two currencies are traded.

The Options Forex market represents 5% of the Forex market because of the misconceptions of the traders regarding its difficulty, capabilities and lack of simplicity. This kind of forex market means that a contract is made between the buyer and the seller. The buyer has the right to trade an amount of currency at a price predetermined. This predetermined price is valid for a predetermined period of time. In this case the current price of the currency is not working. The contract gives the seller the obligation to deliver the currency when the buyer decides to execute the option. The options forex market is different from the spot and the forwards in that both high and low volatility may make a profit. It is a cheaper option for currency trading. It has also the advantage of the added security and the exact stop-loss ability.

Forex Trading is by far the most liquidated financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability, and you will always be able to open and close transactions. Also it is hard to manipulate the market in an extended manner. The market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade. Trading the Forex Market offers a greater buying power than many other markets.

Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position. Almost all brokers offer commission free trading. The only cost that the traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). FOREX can be very beneficial to a variety of people and trading can gain investors a large amount of money either over a long period of time, or in a short period of time. Investors who choose to invest in FOREX are generally well informed about the market and understand the current situations in many countries of the world. Investing in FOREX is simple and highly recommended for anyone who wants to enjoy profits from top-notch investments.