The Forex Market Explained
The foreign exchange market (or Forex market, spot market, or FX) is a currency exchange market.
When you trade the Forex market, you are simultaneously buying one currency and selling another. Currencies are traded through a broker or dealer and are traded as a pairing. An example of these pairings are: the Euro Dollar and the US Dollar [EUR/USD], the US Dollar and the Japanese Yen [USD/JPY], and the British pound and US Dollar [GBP/USD].
Some of the most popular currencies are the US Dollar, the Euro Dollar, the Japanese Yen, the British Pound, the Swiss Franc, the Canadian Dollar, the Australian Dollar and the New Zealand Dollar.
These currencies can be traded 24 hours a day. But there are optimum times to trade depending on where you live.
For example, in the U.S., the time from 8:00am EST to 12:00pm EST, there are two major markets open: New York and London. If you are a night owl in the U.S., then the two markets you want to look at are Tokyo and London, from 2:00am EST to 4:00am EST.
The goal when trading the Forex market is to exchange one currency for another in the expectation that the price will change. Whether the price goes up or down, you can take advantage of the change (by either going long (buying) or going short (selling).)
There are many advantages or benefits to trading the Forex market versus others.
First, there are no commissions. These include no exchange fees, no clearing fees and no broker fees. Unlike other markets, brokers are paid via the bid-ask spread (the difference between what a currency pair is being bought and sold for - also known as pips.)
Ease of entry and exit. The Forex market is an extremely liquid market, meaning that you can enter and exit a trade at the click of a button. Compare that to other markets where your order may not be filled because of the lack of participants.
Leverage. Even a small trader, with limited funds, can control a large amount of currency. For example, a trader with $100 and a 100:1 leverage ratio, can control $10,000 worth of currencies. Leverage can be a great thing with proper money management and discipline, but can also be deadly if not treated with respect. While leverage can be as high as 400:1, it is not prudent to use such a high leverage unless you are seasoned and have developed a good trading strategy with consistent positive results.
The type of account you choose to open will help determine the pip value. For example, a standard account or standard lot is based on $1,000 per lot traded or $10 per pip, if your leverage was 100:1. In other words, you will need a minimum of $1000 of unused margin in your account per lot traded. On the other hand, if you were to open a mini account, you would need $100 per lot traded at $1.00 per pip, if you had a leverage of 100:1
So if you want a liquid market with the ability to trade literally 24 hours a day, and you have discipline, the Forex market can provide you with the opportunity to make money trading online.
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