What is Forex Currency Trading?
With the Federal Reserve off to the printing presses, many wonder how healthy is the US Dollar? With the volatility of the US Dollar, More and more people are looking into trading foreign currencies. That is where the Forex market comes into play.
The foreign exchange market (forex) is the market where world currencies are traded 24 hours a day. This market can serve individuals and businesses (converting currencies) and investors (trading currencies).
The Forex market acts like the stock market except instead of trading stocks, you are trading various currencies from around the globe, everything from Japanese Yen to Swiss Francs to Aussie Dollars.
Buying a currency is similar to buying shares in a particular country. The price of the currency you buy is based on what the market thinks about the current and future financial health of that country.
When you buy a currency like the Japanese Yen, you are essentially invested in the Japanese economy. You will profit if you sell after the Japanese economy does well and its currency increases in value versus other currencies. As a rule of thumb, the exchange rate of one currency versus another is a direct reflection of the condition of that country’s economy compared to other countries’ economies.
So you want to be a currency trader?
Forex trading involves the simultaneous buying of one currency and selling another currency. Currencies are traded through a broker or dealer, and are traded in pairs. When you trade in the forex market, you buy or sell in currency pairs. Here are the major pairs:
Major Currency Pairs
The currency pairs listed below are considered the “majors”. These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.
|EUR/USD||Euro zone / United States||“euro dollar”|
|USD/JPY||United States / Japan||“dollar yen”|
|GBP/USD||United Kindom / United States||“pound dollar”|
|USD/CHF||United States/ Switzerland||“dollar swissy”|
|USD/CAD||United States / Canada||“dollar loonie”|
|AUD/USD||Australia / United States||“aussie dollar”|
|NZD/USD||New Zealand / United States||“kiwi dollar”|
The Forex market offers several appealing features:
- 24 Hour Trading: No opening bells or trying to squeeze in a trade before closing time. The Forex market allows trading at all hours of the day.
- Large volume trading and liquidity: Over 3 trillion transactions take place every day. No need to worry about waiting to find a buyer or seller. If you have a computer, you can place the trades yourself and get almost instantaneous trade executions. This allows you under normal circumstances to get in and get out as desired.
- Narrow focus: Unlike the stock markets that trade thousands of companies each day, the Forex market deals primarily with 8 different currencies. This makes it easier for you to get a better understanding of the major forces in the market and specialize in currencies rather than worrying about thousands of different stock choices.
- Start with low initial capital. Many Forex trading firms allow you to start trading Forex with as little as $25!
- Use leverage to your favor. The Forex market doesn’t require you to make large initial investments because it allows you to use leveraged trading. Leveraged trading allows individuals the opportunity to control thousands of dollars while investing as little as $25. This allows you to profit s or losses of 10 percent or even 100 percent or more in a single day. Keep in mind trading does involve elements of risk and you should invest money that you can afford to lose.
8 Most Traded Currencies
Trading Forex can be an exciting business. Currencies are always on the move and you can profit whether a currency is going up or down in value depending on how you trade. Every little shift in currency rates can translate into hundreds or thousands of dollars in profits or losses.
Here are the eight most traded currencies on the Forex market are:
- EUR Euro
- USD U.S. Dollar
- GBP British Pound
- JPY Japanese Yen
- CAD Canadian Dollar
- CHF Swiss Franc
- NZD New Zealand Dollar
- AUD Australian Dollar
Forex not for you?
Forex trading isn’t for everyone. It does take time to learn the ins and outs of the market and get up to speed on the various trading techniques and strategies. This type of trading is not for the faint of heart, Another alternative to Forex trading would be to use exchange traded funds (ETFs) that have exposure to various currencies. A quick visit to CurrencyShares will show you various exchange traded funds tied to currencies from all over the world.
Did this pique your interest?
If this type of trading piques your interest I highly suggest taking a Forex trading class such as Currency College or Forex.com. These will provide you with the basic and advanced skills needed to get ahead in the world of Forex trading.
If you have participated in Forex trading we would love to hear your experiences thus far!
Photo by bradipo