The Forex Market

The forex market isn't like the usual stock exchange market. In fact it neither has a physical presence nor does it have a central exchange. The forex market stays open 24 hours a day 7 days a week. Its considered as an 'OTC market' or an inter-bank market. The market operates electronically through a network of several banks.

In fact till the late 1990's only those that had 10-50 million dollars could trade in the forex market. But this isn't true anymore. With the Internet connecting the world, even retail players can trade on the forex market. The forex trade is worth $3.2 trillion a day; compare that with $25 million trade on the New York. The forex market is huge and can make profits for the right trader.

Forex will always be traded in pairs, where a currency is sold and another currency will be bought. Forex trading is also done on margins. This means that with a $10,000 margin account, you can trade worth millions of dollars.

Currencies and benefits of trading forex

The most popular currencies that are traded on the forex market are US$, EUR, JPY, GBP, CHF, CAD, AUD and NZD. The US$ is the most widely currency and accounts for 89% of all the transactions, while Euro comes in the second with 37% of all the transactions. The benefits of trading forex are many. There are no middlemen, no fixed lot size, low transaction cots, a 24-hour vibrant market, the leverage is huge, high liquidity and you can even operate an account for as low as $300. All that is required is a computer with a fast Internet connection and software for buying and selling of forex online.

These are some of the basics that one should know before they start trading

The base and the quote currency

In EUR/USD, EUR is the base currency while USD is the quote currency. For example if the quote is .26905/701 then you would sell 1 euro for 1.26905 USD and you would buy 1 euro for 1.26701 dollars. The rates are always given as Bid and Ask rates. The difference between the bid and the ask rates is known as the spread (the profit or the loss that the dealer is making). In this example, the dollar is stronger than the Euro. If you expect that the rates for euro will fall, then you would sell Euro.

In a forex trade, both currencies are sold simultaneously. Traders can buy long, this implies that they can buy the base currency by selling an equivalent of the quote currency. At the time of buying, the trader need not have the required currency. In a similar way, they can sell short without having the base currency.

Sometimes the trader can maintain an open position, where he would buy or sell a currency selling or buying the equivalent amount of the other currency. In open position the trader will benefit from the forex fluctuations in the currency pair. It's important that you understand the positions before actually trading. Most forex transactions are also done on margin money. This helps to build leverage in the market. The profits and the losses are real and if you lose, your margin can also be called upon.