How Forex Trading Works
Forex Trading – Forex, FX trading or currency trading is the buying and selling of the world’s currencies. It is one of the largest and most liquid markets in the world – with daily turnover of $5 trillion. Trading forex allows you speculate on whether the price of one currency will rise or fall against another. You can trade forex as a spread bet – tax efficient or as a CFD. A lot of foreign exchange is done for practical purposes – eg. Large US corporations hedging their profits earned in Europe and bringing them back to the States as Dollars. The vast majority of this $5 trillion daily turnover however is undertaken in order to try and turn a profit and is speculative flows. These FX transactions are carried out by hedge funds, Pension and Insurance Funds, bank traders and the retail trading base – the clients of 3Sigma Markets. Forex Trading is an OTC product. So what does that mean – it is not traded on an exchange like equities are. It is a bespoke market that allows all participants get involved, from multinational corporations to individual investors like us.
Forex is always traded in currency pairs, for example EUR/USD or USD/JPY. Through this process one currency is exchange for the other – ie I buy Euros and I sell Dollars. There’s an exchange rate between each currency pair that fluctuates regularly. Forex traders look to profit on fluctuating exchange rates, speculating on whether the price of one currency will go up or down against another. Forex markets trade 24 hrs a day from Sunday night GMT right through to Friday night GMT – a truly global market.
Why should I start trading Forex?
- Lack of barriers to entry – with the power of leveraging you can trade large amounts of forex with just a small amount of capital
- Liquidity – with FX you are trading the largest market in the world – with this brings ease of entry and exit of positions and ample opportunities within the markets.
- Access to Leverage – with the power of leveraging you can trade large amounts of forex with just a small amount of capital.
- The ability to go both long and short a currency – benefiting from movements in the currency in both directions.
- Forex is an extremely developed market and technology provides us that cutting edge to gain all possible advantages.
- The FX markets never sleep, providing the trader more opportunities to trade given its 24 hours a day, 5 days a week nature.
Trading Forex – the Basics.
Forex is always traded in currency pairs, for example, EUR/USD or USD/JPY. Through this process one currency is exchanged for the other – ie I buy Euros and I sell Dollars. The EUR/USD currency pair is Euros vs the equivalent amount of Dollars, erg, 1 Euro = 1.14 dollars. The first currency in the pair (in this case Euro) is known as the base. This is the currency you think will go up or down in value against the second currency (in this case USD), which is known as the quote or term currency. Currencies are often priced to the fifth decimal point. The smallest increment of any trade is known as a ‘pip’, which stands for percentage in point.