The foreign exchange market (Forex, FX, or currency market) is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world with the largest international banks being the main participants. Financial centres around the world serve as the anchors for trading between a wide range of multiple types of buyers and sellers 24/5. The foreign exchange market determines the relative values of different currencies.
Working through financial institutions, the market operates on several levels. Behind the scenes, banks turn to a smaller number of financial firms known as “dealers/brokers” who are actively involved in large-scale foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”, although a few insurance companies and other kinds of financial firms are also involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereign risk that arises when two national currencies are involved, Forex has little (if any) supervisory entity regulating its actions.
Superior Liquidity: Liquidity is what really makes the foreign exchange market (or Forex) stand out from other markets. There are over 15 foreign exchange markets, which are by far the most liquid financial markets, dealing about one trillion U.S. dollars on a daily basis. This ensures better trade execution and allows traders to easily open and close a transaction. The superior liquidity also makes it possible to focus on only a few instruments as principal investments.
24-hour Market: One of the biggest advantages of Forex market transactions is that they are decentralized. The Forex market operates in financial centers across the globe, starting a trading day in Australia and following the sun through Hong Kong, Frankfurt, London and ending in New York.
Leverage: With the help of leverage Forex market trading provides much greater purchasing power than many other markets.
For example, a trader uses 1:100 leverage, which means that only a deposit of 1,000 USD is required to open a 100,000 USD trade.
Low Transaction Costs: These costs vary from broker to broker, but they are usually relatively low . The most common costs associated with trading are the spread and commission fees charged by the broker for each trade.
Low Minimum Investment: Forex requires less capital to start trading than any other financial market. You can start well with up to 300 USD as a low initial investment, depending on the leverage provided by the broker. This is a great advantage, allowing to keep the investors’ own capital to the lowest level.
Trade online: If you travel a lot, you can trade online from anywhere in the world.
Financial trading involves the buying and selling of financial instruments for different periods of time, usually for medium and short term.
A trader is a person or entity who buys and sells financial instruments such as currencies, stocks, bonds, commodities, derivatives etc. in order to gain financial benefit from the price change.
Here is an example: After careful analysis a trader decides to buy EUR/JPY and makes an order at a price of 131.57 (Ask) for the amount of 400,000 EUR. Let us assume that he was right in his prediction, and after a while the quote for EUR/JPY rises to the level of 132.16, at which point the trader decides to fully close the position by selling 400,000 EUR.
The financial result of this operation will be as follows:
132.16 (closing price) — 131.57 (opening price ) = 0.59 or 59 pips (we get the difference in pips).
In order to calculate the profit we have to multiply the pip difference by the volume of the order:
0.59 x 400,000 = 236,000 — the result in the quote currency, i.e. JPY (Japanese Yen).
It remains to convert the results into the trading account currency. Let’s assume that the trader has an account in USD. Suppose that at the moment of order closure the dollar against the yen (USD/JPY) was 107.19 (Bid) / 107.24 (Ask). To get those dollars one has to buy USD/JPY, i.e. to buy them at the Ask price — 107.24.
So the profit calculated in US dollars will be:
236,000 / 107.24 = 2200.67 USD.
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Risk Warning : Trading Foreign Exchange, CFD, and Equities on margin carries a high level of risk and may not be suitable for all investors. You are advised to carefully consider your investment objectives, level of experience and risk of appetite before deciding to trade. It is possible to sustain a loss of some or all of your investment, therefore you should not invest money that you cannot afford to lose. We advise that you seek professional advice from an independent financial advisor before investing if you have any doubts.