Trade Forex

To trade Forex is to buy one currency and to sell another currency simultaneously. The Forex market is the largest market in the world trading more than three trillion dollars every day. Forex trading is considered speculative meaning that only a low percentage of market activity represents the currency conversion needs of companies doing business across borders and governments. Forex currency trading is also highly liquid which helps to ensure narrow spreads and price stability. When investors trade currency, each currency works against the other. This is due to the constant fluctuation of the market and as a result it provides numerous trading opportunities.

Forex Terms

Let us start with the terms associated with Forex currency trading, also referred to as foreign currency trading. You will need to understand what a bid and ask are. The bid price is the price that you can sell currency at, and the ask price is the price that you can buy currency at. Another term that you should be familiar with is the term spread. The spread is the difference between the bid price and the ask price, or in other words, it is the difference between the price that you can sell Forex currency at and the price that you can buy Forex currency at. The second term that you should be familiar with is a pip.  Pips are the smallest unit in which a cross price quote changes and is determined by comparing the bid and the ask price. To determine the pip when you trade Forex, you have to know how many decimals a country’s currency is quoted at, and then you cancel out the zeroes on the amount you trade. The most commonly traded foreign currencies are called the majors. These are the major currencies:

  • USD   US dollar
  • EUR   Euro
  • GBP    British Pound
  • YEN    Yen
  • CHF    Swiss franc
  • AUD   Australian dollar
  • CAD   Canadian dollar

The first major currency is the U.S. dollar (USD) which is the world’s main currency and is the universal measure to determine all other currencies traded on the Forex exchange. Eighty-five percent of all Forex trades include the USD. The second foreign currency is the Euro. The Euro has a strong international presence and was designed to become the premier currency used to trade Forex. The British pound is heavily traded against the euro and the U.S. dollar, but is not quite as strong as the other two currencies. The British pound used to be the currency of choice until the end of WWII. The Japanese yen is the third most traded currency in the world and is very liquid. It is the liquidity of the majors that makes technical and fundamental analysis of Forex pairs accurate and can lead to profits. The Swiss franc is the only currency of a major European country that does not belong to the G-7 countries or to the European Monetary Union.

Forex Markets

Unlike the stock market which takes place on a central stock exchange, Forex traders trade Forex on the Foreign Exchange Market. They are also able to conduct trading 24-hours a day at whatever times work best for them. This works well for investors who may not be able to conduct Forex trading during the day during their regular work hours. Forex trading is a great way for investors to make money trading however, they must be sure to invest in their education of the Forex markets as well as a Forex trading system that works for them.