The FOREX is a collection of approximately 4500 currency trading institutions, including international banks, government central banks and commercial companies. Export and import payments flow through the Foreign Exchange Market, as well as the buying and selling of assets. This is called the "consumer" foreign exchange market. There is also a "speculator" segment, to offset the risks of international investing.
Historically, the FOREX interbank market was not available for small speculators. With Stringent financial requirements and minimum trading requirements, the small trader was excluded from this market. But today, brokers are allowed to break down the large interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).
Commercial banks play two roles in the FOREX market: (1) Facilitate the exchange of currencies for consumers, and (2) They speculate by buying and selling currencies. The banks take positions on the future worth, whether they will be worth more ("buying long") or less ("selling short") International banks generate up to 70% of their revenues from currency trade, as well as very successful private investors such as George Soros.
When a central bank buys and sells its currency or a foreign currency the purpose is to stabilize their own currency's value.
The FOREX is made up of so many participants, even the government central banks, cannot control the market. For example, compared to the approximately $100 billion exchanged in the U.S. stock markets, the FOREX is huge, and has grown in excess of $1.5 trillion daily.
The word "market" is slightly inaccurate in describing FOREX trading. There is no centralized location for trading activity ("pit") as there is in other markets. Trading occurs over the phone and through the computer terminals of hundreds of locations worldwide.
The majority of the trading is between approximately 300 large international banks, which process transactions for the broader market. A quote from one of these banks is considered the market's current price for that currency, and reporting services provide this "live" price information via the Internet.
There are numerous advantages for parties wishing to trade in the FOREX, including:
Access: Trading occurs on FOREX 24 hours a day Sunday through Friday. A trader can react to news information as it happens. This allows traders to take positions before news fully develops into the exchange. There are FOREX brokers in every major market center around the world and willing to continually quote prices.
FOREX trading is referred to as a "Zero-Sum Game" since no money is ever left on the table in a transaction. Providing the trader picks the right side, there is always money to be made.
Liquidity: In the FOREX market there is always a buyer and a seller! The FOREX can absorb trading volumes that dwarf any other market. On its most basic level, liquidity is very attractive to any investor as it has the freedom to open or close a position at will 24 hours a day.
FOREX traders never have to worry about being stuck due to lack of market interest, which separates it from other high-return investments.
Two-Way Market: Currencies are always traded in pairs, for example dollar-to-yen or dollar-to-pound. Every position involves the selling of one currency and the buying of another. For example, if a trader thinks the Swiss frac will appreciate against the dollar, the trader can sell dollars and buy francs ("selling short'). If one holds the opposite belief, that trader can buy dollars and sell Swiss francs ("buying long").
FOREX trading permits profit taking from both rising and falling currency values in relation to the dollar. In every currency trading one is gaining and the other is losing.
Leverage: Trading on the FOREX is done in currency "lots," of approximately $100,000 U.S. dollars worth of a foreign currency. To trade on the FOREX market, a "margin account" must be established with a currency broker. This is essentially a bank account where profits are deposited and losses deducted.
Brokers have differing margin account regulations, with many requiring a $1,000 deposit to "day-trade" a currency lot. Day-trading is entering and exiting positions during the same trading day. For longer-term positions, many require a $2,000 per lot deposit. In comparison to trading in stocks and other markets, brokers may require up to a 50% margin account, FOREX traders can leverage 1%-2% for the lot.
Execution Quality: Because the FOREX is so liquid, most trades can be executed at the current market price. In all other fast moving markets, such as stocks, commodities, etc., slippage is inevitable, but can be avoided with some software, which allows you to execute at the exact entering price. The huge quantity of market offers allows for high quality execution.
Trade confirmations are immediate and the Internet trader only has to print a copy of the screen for a record of all trading actions. This fact makes many individuals feel that Internet trading makes it much safer than trading over the telephone. Large and respected firms such as Charles Schwab, T.D. Waterhouse, and Quick & Reilly use Internet trading for their customer accounts and would not do so if it couldn't be safeguarded.
Account security is a broker's highest concern and they have taken multiple steps to ensure sensitive information is not released to the wrong parties.
A FOREX Internet trader eliminates the broker salesman middleman, and thus can lower expenses, enter orders faster, and eliminate possible misunderstandings.
Execution Costs: The FOREX does not charge commissions unlike other markets; the cost of a trade is represents in a Bid/Ask spread determined by the broker.
Trendiness: Over long and short historical periods, currencies have illustrated substantial and identifiable trends. Each individual currency has a "personality" of it's own, and offers a unique historical pattern, providing diversified trading opportunities within the spot FOREX market.
Focus: Instead of having an entire catalog of literally tens of thousands of stocks, bonds, commodities, or mutual funds from their respective markets, FOREX traders generally focus on I to 4 currencies, the most common being the British Pound, Japanese Yen, Swiss Franc, and the EURO. Beginning FOREX traders usually will focus on one currency and expand their trading activities.
Margin Accounts: Trading on the FOREX requires a margin account. You are committing to trade and take positions today, and will only hold a position for a few minutes to a few hours and then close out your position for the day.
To trade you will need a FOREX currency broker. Most brokerage firms have different margin requirements; you will need to ask them their margin requirements to trade currencies.
All traders need a margin account to trade. When you gain profits, they place your profits into your margin account the same day you profited. When you lose profits, an account is needed to remove funds. All accounts are settled daily.
To remove your winnings, all you need to do is contact your broker and they will cut you a check or wire transfer your money.
