November 27, 2013 in forex Comments Off

By Paul Bryan

Forex is derived from the words Foreign Exchange and is also occasionally referred to as Spot FX or simply FX. As a simple definition, Forex trading is the exchange of currencies at varying exchange rates, which result in profit (or loss) for those who participate as traders.

Established in 1971 when floating exchange rates began to materialize, the Forex market has enjoyed huge growth, particularly since the Internet advanced to a level that enables trade to be made easily 24 hours a day. More recently, the minimum deposit level for an account has fallen below the $100 mark meaning currency trading is now possible by people from all walks of life.

Historically, the FOREX interbank market was not available for small speculators. With a previous minimum transaction size and often-stringent financial requirements, the small trader was excluded from participation in this market. But today market maker brokers are allowed to break down the large interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).

Commercial banks play two roles in the FOREX market:

(1) They facilitate transactions between two parties, such as companies wishing to exchange currencies (consumers), and

(2) They speculate by buying and selling currencies. The banks take positions in certain currencies because they believe they will be worth more (if buying long) or less (if selling short) in the future. It has been estimated that international banks generate up to 70% of their revenues from currency speculation. Other speculators include many of the worlds most successful traders, such as George Soros.

The Forex market is so large and is composed of so many participants, that no one player, even the government central banks, can control the market. In comparison to the daily trading volume averages of the $300 billion in the U.S. Treasury Bond market and the approximately $100 billion exchanged in the U.S. stock markets, the FOREX is huge, and has grown in excess of $1.5 trillion daily. It is easy to see why trading Forex online has become such an attractive prospect for those would be professional investors.

If we are being honest the word market is not entirely true for Foreign Exchange since there is no one central location for trading activity. Whilst most of the trade volume is performed through around 300 large international banks, there are millions of trades being executed all around the globe both online and over the telephone.

There are numerous advantages for parties wishing to trade in the FOREX. They include:

Liquidity: In the FOREX market there is always a buyer and a seller! The FOREX absorbs trading volumes and per trade sizes which dwarfs the capacity of any other market. On the simplest level, liquidity is a powerful attraction to any investor as it suggests the freedom to open or close a position at will 24 hours a day.

Access: The FOREX is open 24 hours a day, any individual trader can react to news when it breaks, rather than waiting for the opening bell of other markets when everyone else-has the same information. This allows traders to take positions before the news details are fully factored into the exchange rates.

Two-Way Market: Currencies are traded in pairs, for example dollar/yen, or dollar/Swiss franc. Every position involves the selling of one currency and the buying of another. If a trader believes the Swiss franc will appreciate against the dollar, the trader can sell dollars and buy francs (selling short). If one holds the opposite belief, that trader can buy dollars and sell Swiss francs (buying long). The potential for profit exists because there is always movement in the exchange rates (prices).

This is what helps make the Forex unique since it is possible to profit from both rises or falls in the price of any given currency!

_ Trends: Over long and short historical periods, currencies have demonstrated substantial and identifiable trends. E