Forex Trading is buying or selling currencies of different economies or countries.
Forex simply stands for Foreign Exchange. It also refers to currencies. Forex can simply be stated as FX.
What commodity is traded on the forex market? Currencies are the main commodities of forex. And this commodity is bought and sold on the foreign exchange market or the forex market. Every country has a currency, and this currency can only be exchanged for another country’s currency on the forex market. For instance, you decide to travel to a different country. Upon getting there, you would have to change your local currency into the currency of the country you have travelled to. You will therefore need a bank or a forex bureau to do that. Successful exchange simply means you have traded on the forex market.
How do I make money from this forex market? To make money, then you have to just exchange one currency for another currency. But it is not as simple as we make it seem. You need extra education on when to buy and sell and which currencies to buy or sell.
Why is this market so popular? The forex market is the largest financial market in the world. This is larger than all the stock exchanges put together. Now, let me explain why all the stock exchanges can never match up.
Remember the example above? Same happens with the companies listed on the stock exchanges. For instance, Company A, listed on the New York stock exchange decides to transact a business (buy raw materials, host a conference, buy another company, form a partnership, sell commodities, etc.) in Japan. Company A would have to convert or exchange its dollar into Japanese Yen to be able to do so. And should there be any returns in the form of profit from that business in Japan, then company A would have to convert back into US Dollars. All these transactions sum up to make the forex market bigger than all the stock exchanges.
According to Wikipedia.com, trading in the fx markets averaged $5.09 trillion per day in April 2016. The breakdown includes:
- $1.654 trillion in spot transactions (what we are more interested in and involved in)
- $700 billion in outright forwards
- 383 billion in foreign exchange swaps
- $96 billion in currency swaps
- $254 billion in options and other products
This is a whooping big figure (even with the spot market alone) as compared to the stock exchanges that sum up to a total of about $49 billion average daily trading volume.
So simply, the forex market deals with currencies. That is what the forex market is about, CURRENCIES!
Now that you have an idea on what the forex market is, let us look at why you should get involved with it.
The first and obvious reason for everyone (whether you accept it or not) is the potential financial gains. But outside the obvious potential financial gains, let us look at other reasons why we are all involved.
- A 24-hour market. The forex market is opened 24 hours every weekday (except on holidays). You get to trade for a total of 120 hours every week. But you get a mandatory weekend off (if all you do is forex trade) since the market automatically closes on Sunday.
- Low transactional fees. You get to trade at very minimal cost. The only charges you might incur in trading is the spread and swap charges. (we look more into that later). Sometimes too commissions depending on your trading platform and broker.
- No long streaks of middlemen. The only middleman you will meet as a spot forex trader will be your broker. No other middleman. All you will need is your computer or smart phone (yes, smart phone for some trading platforms) and your internet connection.
- This deals with the amount your broker is ready to lend you in order to trade the units you want. It helps you trade huge currency units with a relatively smaller amount in your account.
- Low units to trade. In forex, you can trade as low as 1000 units which is equivalent to $10 margin (if you use a leverage of 100:1)
- High Liquidity. Liquidity simply means the ease with which one can buy or sell a particular currency. So due to the high volume traded within the day and at every time, liquidity is very high and there is no risk of being locked in your trade.
- Few entry restrictions. The only restriction to being a forex trader is being 18 or above. There are no barriers except the fact that you will have to have enough money in order to trade. Some brokers however allow a startup capital of $25. Some other brokers give you bonus to trade with without having to deposit anything.
The above listed are some of the reasons why you should consider becoming a forex trader. Personally, they are all things that have become an important part of me.
You can read more answered questions on forex here.