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Forex Trading

Online currency trading, the newest and most exciting development in the investment world, is a relatively recent phenomenon that owes its existence solely to the Internet. The foreign exchange currency market, or forex as it is commonly known, used to be the domain of governments, big banks, multinational corporations and hedge funds. It is the largest and the most liquid financial market in the world, with approximately $1.9 billion in trades taking place daily. Online trading technology has now brought the foreign exchange into the province of individual investors worldwide.

Forex Trading Background

The original purpose of the forex was to enable governments and businesses to deal effectively. They could purchase goods or services in the currency of a foreign nation and then exchange the profits into the currency of their home country. Speculation in the currency market grew to the extent that today, ninety-five percent of the trades taking place are for-profit.

The forex operates as a twenty-four hour a day interbank, OTC (over the counter) market, with trades taking place six days a week. The term interbank market indicates that there is no central exchange location; forex trades take place online and over the phone, using banks in locations worldwide to convert the trades. The term OTC shows that trades are not completed through a central clearing house or trading floor, but take place between two individuals or parties.

In the United States, any individual, known in the industry as a retail investor, can easily take part in online trading, in the global currency market, through a forex broker. The Commodity Futures Trading Commission, an independent Government agency, oversees all brokerage firms. The agency actively enforces its regulations, and prosecutes companies that engage in forex market fraud. Reputable forex brokers are also voluntary members of the National Futures Association (NFA). The NFA’s role is to safeguard the integrity of the markets, and protect investors.

Forex Trading – How It’s Done

The mechanism of online currency trading is quite straightforward. Trades always take place using a currency pair, buying one and selling the other simultaneously. The object is that the value of the currency bought will increase, and the value of the currency sold will drop. Most trades take place between seven pairs of the most liquid and strong world currencies.

When a retail investor signs up with a forex brokerage firm, they gain access to the broker’s online trading platform and tools. Knowing how to use the tools provided, and make the right pair choices for buying and selling, is vital to successful trading. A novice trader needs to learn the market, the strategies involved in trading, and current market trends. Because forex online currency trading takes place in real time, it involves quick decisions, and it is critical to learn the ropes before diving in to trades.

Forex Terminology

Knowledge about basic currency trading concepts and terminology is vital. In the forex market, there are two pricing terms, “bid” and “ask”. If the price of one currency pair, for example, EUR/USD, is 1.5161/64 then 1.5161 is the bid price, the lower number; a person willing to buy the Euro is offering this amount. The second number, 1.5164, is what the holder of the Euro is asking.

Another term commonly used in the currency market is “PIP”, or price interest point. A PIP is the incremental move of one currency against another. If the bidder in the previous example increased his bid to 1.1564, it would represent a four PIP move.

Another frequently encountered forex trading term is “price quote”. A quote represents the pricing that the world market offers for a given currency pair at that moment. Due to the global, liquid nature of the forex, quotes change from one instant to the next.

What Affects The Forex Market?

A successful online currency trader also needs to learn what affects the demand for a given currency. Understanding the causes of shifts in currency demand helps a trader make informed decisions on what to buy and what to sell. Major factors that affect the demand for a nation’s currency are inflation, interest rates, gross domestic product, trade agreements, budget issues, the internal stock market conditions in the country, plus the economic and political conditions. These factors deserve consideration when deciding on potential trades.

How Should You Start With Forex Trading?

For the new investor, a forex trading course is an excellent learning tool, and it should cover as many aspects of online currency trading as possible. Key items such as leveraging, margins, and types of orders are essential inclusions. The course should also cover basic terminology, software usage, and analysis methods. Analysis is one of the keys to successful online currency trading, and a new trader is wise to learn both fundamental and technical analysis and their tools.

Venturing into a new world of online currency trading can be nerve-racking; a smart investor’s first step is to sign up with a reputable forex broker. Before any commitment of funds, it is advisable to investigate a broker’s credentials, policies, reputation and business standing.

The dynamic financial market place that is now within easy reach of the average investor provides an astounding opportunity. With the right knowledge and tools, success in the exciting arena of online currency trading is possible through an individual’s diligent investment of both funds and effort.

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