As an additional aid for those who are new to Forex, there is also a glossary at the bottom of this text which explains some of the terms used in connection with currency trading.
Overview
Foreign exchange , forex or just Forex are all terms used to describe the trading of the world's many currencies. The forex market is the largest market in the world, with trades amounting to more than $1.5 trillion every day. This is more than one hundred times the daily trading on the NYSE (New York Stock Exchange) . Most forex trading is speculative , with only a few percent of market activity representing governments' and companies' fundamental currency conversion needs.
Unlike trading on the stock market, the forex market is not carried out by a central exchange, but on the "interbank" market , which is thought of as an OTC (over the counter ) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the forex market is a 24-hour market.
Trading Forex
A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called "majors" - EURUSD, USDJPY, USDCHF and GBPUSD.
The most important forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled "immediately" or on the spot. In practice this means within two banking days.
Trading on Margin
Trading on margin means that you can buy and sell assets that represent more value than the capital in your account. Forex trading is usually done with relatively little margin since currency exchange rate fluctuations tend to be less than one or two percent on any given day. To take an example, a margin of 2.0% means you can trade up to $500,000 even though you only have $10,000 in your account. In terms of leverage this corresponds to 50:1, because 50 times $10,000 is $500,000, or put another way, $10,000 is 2.0% of $500.000. Using this much leverage gives you the possibility to make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to maximise your leveraging as the risks can be very high. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled "Trading Conditions" found in the top right-hand corner of the Account Summary.
Why trade Forex?
- 24 hour trading
One of the major advantages of trading forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets. - Superior liquidity
The forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and low spreads . The liquidity comes mainly from large and smaller banks that provide liquidity to investors, companies, institutions and other currency market players. - No commissions
The fact that forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis. Trading the "majors" is also cheaper than trading other crosss because of the high level of liquidity. For more information on the trading conditions at Saxo Bank, go to the Account Summary on your Client Station and open the section entitled "Trading Conditions" found in the top right-hand corner of the Account Summary. - 50:1 Leverage
With a minimum account of USD 10,000, for example, you can trade up to USD 500,000. The USD 10,000 is posted on margin as a guarantee for the future performance of your position. - Profit potential in falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the U.S. dollar gets stronger against the Euro and vice versa. So, if you think the EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your profits. The opposite trading scenario would occur if the EURUSD appreciates .
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