What is Trading - Learn Forex (Fx) Markets

What is Trading?


Forex Trading
This is a question I get a lot: "What is Trading?" and "Who is a Trader?"

Trading is the act of engaging in trade and a Trader is one who Buys and Sells Goods, Currency, or Stocks. Trade can also be defined as the transfer of ownership of goods and services from one person or entity to another by getting something in exchange from the buyer.



Simple right? Now that we have identified the above, we can move on to learning more about Trading. The world of trading is vast and unfortunately majority of the world's population are left in the dark when it comes to Trading. I will try and change this scenario by Writing about Trading. My main area of focus will be Forex Trading. Most Financial Traders have a specific market they usually trade in and Forex Trading is one of my particular interests.

There are many other forms of trading including Stock Trading, Commodities, Bonds, Futures, Equities and others.

On this website, most of my efforts will be towards writing about Forex (Fx) Foreign Exchange Currency Trading.

Forex Trading

Okay, now we move on to another question I hear a lot. "What is Forex Trading?"
For starters, Forex simply stands for Foreign Exchange. The Foreign Exchange Market (Forex, FX, or Currency Market) is a form of exchange for the global decentralized trading of international currencies. Simply put,the Buying and Selling of Currency (Money).

The Foreign Exchange Market, is the Largest Financial Market in the World. Compared to the small $74 billion a day volume of the New York Stock Exchange, the Foreign Exchange Market looks absolutely huge as anything with its almost $4 TRILLION a day trade volume. Forex is King of the Markets in every sense!

That huge trillion number covers the entire Global Currency Exchange Market, but note that Retail Traders which basically means us, trade the Spot Market and that's about $1.49 trillion. As you can see, the Fx Market is definitely large on a global scale, but not as large as the media would like you to believe.

The $4 trillion break-down is as follows:

  • $1.490 trillion in spot transactions
  • $475 billion in outright forwards
  • $1.765 trillion in foreign exchange swaps
  • $43 billion currency swaps
  • $207 billion in options and other products

Financial Centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The Foreign Exchange Market determines the relative values of Different Currencies. In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to other countries' economies.

Forex Trading assists International Trade and Investment by enabling currency conversion. In a Forex Transaction, one person purchases a quantity of one currency by paying a quantity of another currency. The modern currency exchange market began forming during the 1970's.

The Currency Exchange Market is the Most Liquid Financial Market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the Global Foreign Exchange and related markets is continuously growing. That's a plus for anyone looking to Trade Forex. It probably is one of the best investment tools out there, but of course, you have to learn about trading which like anything else takes a long time to become any good at it. Like any other form of investing, of course it has its risks. So be careful when deciding to Trade Currencies or any other markets for that matter.

FX Trading

Liquidity

Another question that I hear a lot: "What is Liquidity?"
In Business, Economics or Investment, Market Liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value.
Therefore in the Forex Market, liquidity pertains to a currency pair's ability to be bought and sold without causing significant change in its exchange rate. A currency pair is said to have high level of liquidity when it is easily bought or sold and there is a significant amount of trading activity for that pair.

Unlike other Financial Markets like Stock Exchanges, the Forex Spot Market has neither a physical location nor a central exchange. The currency market is considered an Over-the-Counter (OTC), or "Interbank", market due to the fact that the entire market is run electronically, within a network of banks, Continuously Over a 24-hour Period. This means that the Spot Forex Market is spread all over the globe with no central location, meaning it can take place absolutely anywhere in the world.

This means Forex attracts a wide number of traders from All Over The World making it the most liquid market to trade in. And before you start counting the money just remember, if only it were that easy, we would all be gazillionaires!

Different Types of Forex Trading


There are a number of different types of Forex Trading. This market being absolutely huge, Currency Traders came up with a number of different ways to invest or speculate in currencies. Among these, the most popular ones are Forex Spot, Futures, Options, and Exchange-Traded Funds (or ETFs).

Spot:

In the Spot Fx Market, currencies are traded immediately or "On The Spot," using the current market price. A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, Euro and Russian Ruble, which settle the next business day), as opposed to the Futures Contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.

Futures:

Futures are contracts to buy or sell a certain asset at a specified price on a future date hence the name. The average contract length is roughly 3 months. Futures Contracts are usually inclusive of any interest amounts.

Options:

A Foreign Exchange Option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The options market is the deepest, largest and most liquid market for options of any kind in the world. Just like futures, options are also traded on an exchange.

ETFs:

Exchange-Traded Funds (ETFs,) contain a set of stocks combined with some currencies, allowing the Trader to diversify with different assets. These are created by Financial Institutions and can be traded like stocks through an exchange. Like Fx Options, the limitation in trading ETFs is that the market isn't open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs.

Advantages of Trading Forex

Now that you have learned about Forex, and the different types of Trading Forex, let's take a look at the Advantages of trading in these markets.

Decentralized

Unlike in Trading Stocks or Futures, you don't need to go through a centralized exchange like the London Stock Exchange with just one price.

Commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Retail Brokers get what is called a Bid Ask Spread as compensation.

Middlemen

Spot Currency Trading Eliminates the need for Middlemen which is awesome.

Low transaction costs

The retail transaction cost (The Bid/Ask Spread) is typically less than 0.1% under normal market conditions.

Individuals or governments cannot dominate the market

'In Italian' - 'l’impossibile'

Great Leverage

In Currency Trading, a Small Deposit can control a much larger total contract value.

Even small pockets can trade

Online Forex Brokers offer "mini" and "micro" trading accounts, some with a minimum account deposit of $25 which is awesomeness - but not usually recommended.

Demo Accounts

Online Forex Brokers offer "Demo Accounts" on their software platforms to practice trading and build your skills.

No Waiting, a 24 hour Operation

Yes, another awesome feature of  Trading Forex.

And there you have it, the major advantages of Trading Currencies over other markets. Good Right!


Forex

Where Do I Start

Forex Trading Training

You're probably wondering how you can start Trading Forex. I have good news.

There are many online resources that can help you learn forex and be on your way to becoming a Forex Pro after training. BE WARNED, IT IS NOT EASY AS OTHERS MIGHT LIKE TO MAKE IT SOUND. Like anything, learning Forex Trading will take time and extreme patience. But like anything in life, you have to start somewhere. Once you learn the concepts, and perhaps even attempt to do a few demo trades, you should have a clearer picture if currency trading is something you would be interested in pursuing full time, part time or leave it.

I am a firm believer that people should do what is best for them. Currency Trading is not for everyone and some even find it excruciatingly boring and tedious. Others like the buzz of having to think quickly and do Scalp Trading or Technical Trading whilst others prefer the Long Term or Fundamental Trading approach and may even buy or sell a Countries Currency for the long term. Whatever floats your boat. The best advice I can give is give it a try even if it is just to learn more about this world. But be wary of people claiming to give you tips and things of that nature. Be very wary. Currency Trading like anything else can incur huge losses. In fact losses will most certainly occur. No trader doesn't experience losses. Even the famous stock trader Warren Buffet losses on many occasions.

The best free resource I have found to learn forex is BabyPips.com. There, you will learn all the basics you need to learn to start trading forex on your own. They are a great bunch and will give you all the help you need on the forums. Also ForexFactory.com with great forums to weed out scamming salesmen and brokers.

Like anything else, Wikipedia.com is also a great place to learn about what everything means.

After learning the Forex Basics, you should then find a suitable Online Forex Broker with whom you can open a Demo Fx Account with and start messing about with Currencies.

Okay I hope I have shed some light of Forex Trading and why so many people Trade Forex for a living. I will be writing a lot about Forex in this blog when I do get the time.

Happy Learning and all the best with your trading.

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