The simple answer is this: It is a place where individual and institutional traders alike can buy and sell various currencies from around the world in order to make a profit.
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Here’s a little history on the Currency or Foreign Exchange (Forex or FX) market. In reality exchanging currencies has been around since the time of the pharaohs in Egypt. Even during the middle ages there were forms of currency trading. After WWII, the Bretton Woods Accord was estab lished to help stabilize the global economy. During this time, speculation in the various national cur rencies helped to destabilize the currency market. This accord limited the flow of currencies from one country to another and valued their currency to that of the U.S. Dollar. At that time, the U.S. Dollar was valued against a certain amount of gold, which was called the “Gold Standard”.
In 1971, the U.S. Dollar abandoned the gold standard, which created an increase in the amount of currency trad ing. During this same time, the Smithsonian Agreement was created and was in effect until 1973 when it failed. It was during this time, that the FOREX market, as we know it, came about. The current “Free Floating System” began and opened the door for individuals to take advan tage of trading in foreign currency markets. Now that the personal computer and Internet are readily available to all, the foreign exchange markets are giving individual traders the opportunity to take advantage of currency trading.
Today, the Foreign Exchange market is the largest finan cial exchange in the world, trading between $1.9 and $2.5 trillion each day. This is 30 times more than all the volume in the U.S. markets combined. The FOREX market transactions are conducted between two counterparts over an electronic network.
So who trades in the FX Market? Well, a few of the participant are as follows:
• Governments and Central Banks
• Banks and Investment Banks
• Hedge Funds
• Investors and Speculators
So, why would a trader be interested in trading the Forex Market? Well here are some good reasons why you might consider trading FOREX:
1. 24 Hours – 6 Days/Week Trading
The Foreign Exchange market is open for trading six days a week, 24 hrs per day. This is a major advantage over the stock market, where you are limited to trading during certain hours of the day. This means that you can trade morning, noon, or night. Anytime, is the right time with the FOREX market. This also allows you to trade when news comes out, without waiting until the morning for the market to open. Because the market does not close during the week, you won’t see gaps in price like you do in stocks during after hour trading.
The Forex market begins each day in Sydney, and moves around the world as the market day begins in each financial center, beginning in Tokyo, London, and then New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social, and political events at the time they occur – day or night. The markets are open from Sunday afternoon to Friday after noon.
• Tokyo Opens: 8:00pm EST
• Tokyo Closes: 4:00am EST
• London Opens: 2:00am EST
• London Closes: 12:00pm EST
• New York Opens: 8:00am EST
• New York Closes: 4:00pm EST
2. High Liquidity
With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX market. The liquid ity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.
The liquidity of the Foreign Exchange market is between $1.5 and $2.0 trillion daily.
Trading with certain Forex brokers gives you the abil ity to trade with up to 400:1 leverage, which substantially exceeds the common 2:1 margin offered by stock brokerages. At 400:1, traders post $250 margin for a $100,000 position in the currency market.
4. No Commissions
It is much more cost-efficient to trade currencies, both in terms of commissions and transaction fees. Most FX deal ers charge NO commissions or fees whatsoever, while still offering traders access to key market information and trad ing platforms. Another important point to consider is the width of the bid/ask spread. Regardless of deal size, FOREX dealing spreads are normally three to four pips in the major currencies.
5. Make Money Regardless of Market Direction
When you open a currency position, an investor is long in one currency and shorts the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means potential exists in both a rising and falling market.
The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero-Up-tick rule, which prevents inves tors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
Trading in the currency market can be made simpler than trading in any other financial market. Typically, you will find that the fundamental data is easier to interpret and is read ily accessible. Calendars of economic events are available to know exactly when and what government reports are due out. In addition, searching through 15,000 stocks can be a monumental task, but with the currencies, traders are dealing with about six major pairs and that’s it. Technically speaking, the currency markets tend to trend extremely well, which gives us the ability to trade with the trend even better than with the stock market.
7. Risk Control
When Trading the FOREX market not only can you control your risk, as with most other markets, but you also have the advantage of instant fills with very little slippage and tight stops. The risk control with the FX market is above and beyond that of the stock and options markets. This is due, in part, to the extremely high liquidity that allows for such good fills on all orders placed.
8. Minimal Start-up Cost
You can begin trading currencies with as little as $200 and make trades with as little as $25 or less. This allows you to begin trading without the high cost that may be associated with setting up stock accounts. With the high level of margin, this amount of money can allow you to begin building your trading account quickly. In addition, you don’t have expensive software or data feeds you need to purchase.
9. High Income Potential
By implementing the correct education, combined with the high amount of leverage, you have the potential to make significant income trading currencies.