What is Forex Trading

What is Forex Trading
Forex is the largest financial market in the world. With the popularization of internet trading this currency market was accessible only to financial institutions, large global corporations and those with large pools of cash with connections. Not anymore, internet trading has changed the FX world and individual investors are now anxious to get involved.

What’s so different?
Stocks, options, futures commonly known as equity markets, are traded through a central exchange. Currency trading is not executed through a central exchange. Depending on various national regulations, there are limits and controls to the market but overall it has no central clearing exchange.

Another difference is the ability to trade in either direction. During regular market conditions you can sell a currency pair as easily and you can buy it. Regular market conditions are extremely liquid. Another difference is limit on transaction size. There are also no limits. If you had the credit, or the capital, selling $600 billion worth of any currency pair is possible.

Another key difference is that the market is open 24 hours a day 5 days a week. That’s right, you can trade at 3AM if you wanted to. This is a double edged sword and leads some first time traders into the trap of sitting at their computers nonstop.
The last difference we will discuss is the way trading costs are implemented. When entering a trade the trader is charged a bid-ask spread. This may seem confusing at the moment but will become clear in practice.

It’s all about the Pip
Pip’s are the smallest increments of trade in Forex. Most currency pairs are quoted to the fourth decimal point, the notable exceptions being those that have the Japanese Yen in the pair. If that fourth decimal place value changes, then the “pip” value has changed. Currencies with the Yen in them are only quoted to two decimal points.

Will I ever have to take delivery of the currency?
No. In all reality you really aren’t buying or selling anything. You are speculating on the value differential between the two currencies in the pair. You will never receive a shipment of Swiss Francs. The main reason the market exists is because larger players need access to various currencies to pay for things like payroll and equipment. However the vast majority of transactions are speculative.
Just imagine that you have travelled to England form the United States, you will need Pounds to pay for your expenses while on your trip. At the front of the airport will be a kiosk where you can exchange US Dollars for GB Pounds. You have sold your US Dollars to buy GB Pounds. These are the basics of the transaction you are completing; only you aren’t going to actually exchange the money. Your losses or earnings will be denominated in the currency in which your account was opened.

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