What Is Forex Trading?

Foreign Exchange (forex) is the simultaneous buying of one currency, and selling of another currency.

Daily volume in the currency market exceeds $1.5 TRILLION, making it the largest and most liquid market in the world. Unlike other financial markets, the forex market has no physical location or central exchange. It is an over-the-counter market where buyers and sellers including banks, corporations, and private investors conduct business. Foreign exchange trading takes place in financial trading centers all over the world, including New York, London, and Tokyo creating one cohesive, international market. The huge number and diversity of players involved make it difficult for even governments to control the direction of the market. The unmatched liquidity and around-the-clock global activity make forex the ideal market for active traders. Traditionally the forex market was only available to larger entities trading currencies for commercial and investment purposes through banks. Now trading platforms, allow smaller financial institutions and retail investors access to a similar level of liquidity as the major foreign exchange banks, by offering a gateway to the primary (Interbank) market.


Buying/Selling

In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.

Quoting Conventions

The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar, as the world’s dominant currency, is usually considered the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions are the Euro, Great Britain pund, and Australian dollar. These currencies are quoted as dollars per foreign currency.

Margin

The margin requirement allows traders to hold a position much larger than the account value. The trading platform performs an automatic pre-deal check for margin availability, and will only execute the deal if the client has sufficient margin funds in his or her account. The system also calculates the funds needed for current positions and displays this information to clients in real time. In the event that funds in the account fall below margin requirements. This prevents clients' accounts from falling below the available equity even in a highly volatile, fast moving market.

Rollover

In the spot forex market trades must be settled in two business days. For example, if a trader sells 100,000 euros on Tuesday, the trader must deliver 100,000 euros on Thursday, unless the position is rolled over. The swap rates are determined at the Interbank level and are tradable instruments. In any spot rollover transaction there is a difference in interest rates between the two currencies that will be reflected in the overnight loan. If the trader is long the currency with the higher interest rate in the pair, the trader should gain on the spot rollover through the premium relationship of that currency relative to the short currency. The amount of the gain is determined by the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices.
What Every Currency Trader Should Know:

The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. Knowing that even seasoned traders suffer losses, speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one's personal financial well being.