The ‘Foreign Exchange Market’ encapsulates the system of exchanging one currency for another. Otherwise known as Forex, FX or 4X, it is arguably the largest and most liquid market in the world with trillions of trades occurring every day. Currency trading goes a lot further than the action which occurs at the Bureau De Change before your holiday.
In basic terms, Foreign Exchange Trading is the purchase of one currency whilst simultaneously selling another, for example trading Euros (EUR) for US Dollars (USD). Unlike the stock market, the foreign exchange market is decentralised. As it is run electronically, it is considered an over-the-counter or ‘Interbank’ market. This means that trades can be made 24 hours a day, 7 days a week all over the globe.
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Millions of individuals make trades based on predicted changes in the values of currencies. In the same way as with the stock market, people will speculate on the movements within the market. Forex traders will then try to use any fluctuations to their advantage. Forex traders choose two currencies which they expect to change in value and subsequently make a trade.
The bulk of trading volume on the Forex market occurs from traders buyers and selling based on these speculated price movements. The speculative aspect of the market means that the amount of trading happening at any given time tends to be very high which can lead to people being able to buy and sell currencies with relative ease.
As the world’s most liquid market, Forex capacitates these high trading volumes with little effect on the prices of the currencies. The notion of liquidity is important to many investors which is why the Foreign exchange market often proves a popular platform. Having said this, the depth of the market could change at any time.
Can I trade on the Foreign Exchange Market?
Because of its high liquidity and accessibility, a growing number of investors are choosing to trade on the foreign exchange. At novice level, it is important to ensure that you are well-informed on the subject and expert advice has been sought.
As with all trading, there is significant risk involved which cannot be overlooked. You could lose some or all of the money that you invest. Therefore it would be highly advisable to seek the partnership of a trained broker.
A broker will act as an intermediary between the trader and the currency exchange market – the buyer and the seller. Initially a full service broker should discuss with you the options, find out what you want to trade, how much and when. They should be able to talk you through the process thoroughly before you decide to make any trades or investments.
They will be able to break down the technical side of the trading process and the key notions related to Forex trading such as ‘fundamental analysis’, ‘spreads’ and ‘pips’. When choosing a broker, it is important that you choose one that is well-reputed and can offer you the service you require.