Nov 19, 2012

Forex Trading Basics

Forex trading is the buying and selling of currencies that takes place in the foreign exchange market. Up until a few years ago trading in currencies was not open to the general public and only a fee large financial institutions and banks were allowed to trade in currencies. Ever since the markets have opened up, anyone can trade in currencies by using various forex trading platforms that are available with forex brokers.

The forex market is the world’s largest trading arena. Daily volumes go as high as trillions of dollars. These volumes are higher than all the stock exchanges of the world put together. The popularity of the forex markets is increasing every day and the market is growing at a rapid pace too.

Key Characteristics of Forex Trading

Forex trading involves the selling and buying currencies. This is why it is one of the most liquid investments that one can think of, making it extremely different from the real estate market or the stock market too. All trading is carried out over the counter and there is no central marketplace like there is in the case of stocks. This decentralization means that traders can choose to purchase from various dealers that are present in the open market and ensure that they get the best rate that is possible. It allows for higher levels of competition and comparison of prices. The same decentralization also indicates that there is no central regulating or controlling body in the case of forex trading. Another aspect that differentiates the forex markets from others is that it is open 24 hours a day for 5 days in a week.

Basics of Forex Trading

When you buy a currency you also sell another currency at the same time. One of the currencies is called the base currency and the other is called the counter currency. The value of the currency that you are buying is determined by the amount of the other currency that you need to pay in order to buy it. The currency that you buy is called the base currency and the one that you are selling is called the counter currency. Since two currencies are involved in each trade, currencies are almost always quoted as pairs. The four major currency pairs that are traded in the markets are EUR/USD, USD/JPY, GBP/USD and USD/CHF.

Forex Trading Platform

The trading platform is the most important tool for a forex trader. This is why forex brokers ensure that provide an opportunity to the new trader to test out the trading platform by using their demo account. But remember, the best forex broker isn't necessarily the broker that gives you the best forex platform.  Not only does this demo account give an opportunity to the trader to test out the specific trading platform, it also allows for newcomers to trade in a virtual environment that simulates real life scenarios. Everything in the demo account is exactly how it will be in the real forex market except for the fact that real monies are not involved. You can choose currencies to deal in, decide the level of risk that you will take, track rates, place trades and decide stop loss too.

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