Currencies are traded in pairs on the Forex, which involves the simultaneous buying of one currency and the selling of another. You may trade the Euro dollar and the US dollar (EUR/USD) pair or the British pound and the Japanese Yen (GBP/JPY) pair, as examples.
In effect, you are buying the currency of a particular country. This equates to taking a position in that nation’s economic growth. The price of the currency is a direct reflection of what the market thinks about the current and future health of that nation’s economy. If you buy the Japanese Yen, you are in effect buying a share in the Japanese economy with the belief that their economy will expand in comparison to the economy of other counties.
The Forex has no physical exchange or central market. Instead, it is an Over-the-Counter (OTC) or ‘Interbank’ market. The entire market is run electronically, within a network of banks.
The market is available continuously open. This 24-hour market is achieved by a transitioning of trading activity around the globe. Trading begins in Sydney, Australia, then shifts to Tokyo, Japan. Next, London, England takes over and then “passes the baton” to New York. As New York shuts down, Sydney is opening for business.
The foreign exchange market was not designed for retail traders, but was originally intended to be used by bankers and large institutions. Prior to the late 1990’s, only these “big boys” could play the Forex trading game. To get started, you needed to satisfy an initial capital requirement of $10 to $50 million. These high capital requirements and lack of access kept the doors shut to most of us.
With expansion of the Internet, online Forex trading firms began to offer trading accounts to ‘retail’ traders. With reduced capital requirements and online access all you need to get started is a computer, a high-speed Internet connection, and an understanding of the Forex market and how to trade it profitably.
The Forex market comes with a series of additional benefit, which make it irresistable to traders. There are only seven major currency pairs. Compare that to tracking thousands of stocks. There are no commissions or exchange fees. Your broker simply makes their money from the difference on the bid / ask spread. This is also the most liquid market anywhere.
There are other benefits, but you probably have an idea as to why currency trading is quickly growing in popularity with retail traders. The obstacles to accessing these benefits have been largely eliminated, with knowledge the only barrier between you and forex trading profitability.
If you wish to learn more about the basics of how the foreign exchange market works, you will find numerous resources on the Internet and can access reliable information from reputable Forex brokers. There are many good books on the subject available at very reasonable prices.
Once you understand the basics and choose to take the next step, you will want to invest in a solid trading course from a reputable source. With good instruction, there is very little that stands between you and the ability to benefit from trading the foreign exchange currency market.
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