Guide To Trading Forex – Understanding Forex
Follow this short Guide to Trading Forex as your first step in understanding the intriguing and potentially rewarding world of Forex trading
When the currency of one country is traded against the currency of another it is termed Foreign Exchange or simply the more recognisable term of Forex. The guide to trading forex estimates that the foreign exchange market is currently the worlds largest financial market with daily transactions of some $1.9 trillion being carried out. To further emphasize the scale of the market, figures obtained by the Guide to Trading Forex indicate that this equates to around 3 times the combined transactions of the US Treasury and Equity markets.
Traditional financial markets will tend to have a central exchange and a specific location, however the foreign exchange market has neither. The Forex market operates only through a network of individuals, corporations and banks all trading one foreign currency for another and is spread throughout the world. The result is that the foreign exchange market, with no phsical location is able to operate through all major financial centres and time-zones giving a truly worldwide reach.
Previously, as a guide to trading forex, should a retail investor want to trade on the foreign exchange, this could only be achieved through the banks where dealings tended to be for huge sums of money which was primarily for investment or commercial reasons. Exchange rates were first allowed to float freely back in 1971.. This led to a dramatic increase in the trading volumes. Many organisations, such as international companies, importers and exporters now purchase products and services and even pay their employees in foreign currency.You also have international portfolio managers along with speculators, long-term holders and day traders who carry out transactions in various financial assets using the Forex market. It is also possible to utilise the services of what are termed hedge funds. In essence, they will hedge their risk in a variety of markets to reduce of significant currency movements.
Another key fact to be taken into consideration is that in the foreign Forex market, there is hardly any way to obtain any inside information. All the foreign exchange rate differences are the result of the volume of money flowing through the marketas also any speculation in assumptions concerning the worldwide macroeconomic conditions. Any information likely to have an effect on the market is usually released to the world at exactly the same time.
It is usual practice in a foreign exchange market for foreign currencies to be traded against one another. Two foreign currencies are considered to be a single product denoted as AAA/BBB. AAA is the internationally recognised ISO 4217 standard 3 letter code for a specific foreign currency. In the same way, BBB is the recognised code for a different currency. Therefore AAA/BBB indicates the price of AAA in terms of BBB. To give an example, EUR/USD shows the price of the Euro in comparison to the US$. EUR/USD is 1.2776 means that 1 Euro equals 1.2776 US$.
There is more than one way in which the foreign exchange market differs from the stocks and futures exchange market. The foreign exchange market is actually an interbank and an across the counter market. What this means is that foreign currency pairs do not have fixed worldwide exchange rates. This is because of the 24/7 activity of the foreign currency market. In effect, individuals will be involved in foreign currency transactions with foreign exchange brokers who in turn will be involved in transactions with banks. Banks will transact with other banks and so ad infinitum.This also means that even if one trading session ends somewhere, a new one is starting elsewhere. An example of how this works is when the Asian trading session finishes the Europen one will be just beginning. By the time this finishes, the US session will be well under way. What this means in reality is that at all times all currencies are in-play somewhere in the world.This also has the effect that it is not necessary for traders to rely on local markets opening to enable them to carry out a transaction. In effect they can react immediately to any breaking news that might have an impact on the Forex market.
Click here for the Guide To Trading Forex and find out more of what you need to know to getting successfully started in Forex Trading.
Nigel Conrad is author and webmaster of the Guide To Trading Forex website
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