How Currency Trading Works

What You Should Know About Forex Trading

Foreign exchange (of forex) trading is where traders, ranging from the largest multinational companies to any average-earning individual, simultaneously buy and sell currencies over the counter. In essence, the currencies are traded to gain profit, depending on the fluctuating values of the currencies.

The following are some of the most interesting facts about forex trading:

  • Trading volume. Recent data reports that the forex trading market has a daily turnover of about USD 3.98 million. Majority of this revolves around the world’s currencies with the highest liquidity, including the US dollar, the euro, the British pound, the Japanese yen, the Canadian dollar, and so on.
  • Geographical coverage. Using the Internet, you could participate from anywhere in the world. Forex trade activity is most active in the US, Europe, Asia, and North America.
  • Work hours. The forex market is open 24 hours a day except on weekends.
  • Market participants. It is amazing how the forex trade have become the place for banks, firms, hedge funds, and retail forex brokers (individuals) to conduct with each other. The Internet is one major factor why this has been made possible.
  • Unpredictability. One thing exciting about forex trading business is its fluidity. Profits are of lower margin compared to other markets that entail fixed income. However, there is the opportunity to gain big profits because of the large trading volumes.

How Does It Work

The forex market is not governed by any single institution or body. The market is like a network where currencies are bought and sold by different prices, depending on what the market makers are trading. Traders compete and wok alongside each other to get the highest possible earnings they could with their investments.

It is common practice for investors to require the services of a broker to help them trade stocks, futures, and options. The broker carries out the transaction based on the investor’s preference then gets a commission when the instrument in question is bought or sold.

The forex market is a principals market. Forex brokers are essentially dealers, who assume market risk by being the counterparty to the trade of the investor. They earn through the bid-ask spread instead of commissions. Another distinction you should remember about forex trading is that brokers do not usually bid or sell at any offer. Once the price clears the spread’s cost, the investor is entitled to every cent gained without any additional fees.

One thing anyone interested in venturing into the forex trade market should bear in mind, is that losses are an everyday occurrence. That is one inevitable fact about forex trading; the market has bad times and good times. Do not be discouraged if you lose a few.

Do not underestimate the strategy of your chosen broker, who might be looking to reap the benefits of your investment over a longer period. Try to develop your own strategy after studying and observing the market closely. Continue going that way if your investments show gradual gains because your money will surely grow in the long run if you keep this up in.
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