What is Foreign Exchange aka Forex, FX or currency trading?
What is Forex?
Forex is a globalized decentralized marketplace where currencies around the world are traded. The forex market is the world’s largest and most liquid financial market with trading exceeding USD2b daily. Currency trading is done over the counter (OTC) which means that all transactions occur over computer networks. The forex market for retail investors is open 24 hours a day for 5 days a week from Sunday 5pm EST (Monday 5am Malaysia) until Friday 4pm EST (Saturday 4am Malaysia).
The forex market are traded in three markets:-
- Spot market: where currencies are traded according to current price.
- Futures market: where futures contracts are traded based upon standard size and settlement on public commodities market.
- Forward market: where contacts are bought and sold OTC between two parties with terms both parties agree on.
Forex Trading Basics
All Forex trading is done in pairs between two currencies. Currencies are usually priced to four decimal points where the smallest trading point percentage is known as a pip. Currencies move up and down affected primarily by supply and demand. Information including interest rates, economic data, geopolitical factors, and positive/negative news affect currencies. Forex trading costs are determined by the bid (buying) – ask (selling) spread (price difference).
Most Traded Currencies
- US Dollar (USD)
- Canadian Dollar (CAD)
- Euro (EUR)
- British Pound (GBP)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
- Australian Dollar (AUD)
- Japanese Yen (JPY)
Forex Trading Pros
- Liquidity, market size, and long trading hours available.
- Small trading amount available by trading in micro lots.
- Leveraged trading easily available allowing starting with small capital.
Forex Trading Cons
- Very high volatility which can cause significant losses if not properly managed.
- Small retail traders are at a disadvantage compared to larger players who can set and influence prices.
- Leverage is a double-edged sword which magnifies losses as well as gains.