What is Forex?
The foreign currency exchange market, also known as the forex or FX market, is the single most traded financial market in the world. Forex trading is the buying of one currency and the selling of another. Currencies are always paired. Some of the best-known currency pairs involve the US dollar, the Euro, the Japanese yen, Pound Sterling (GBP), the Australian dollar, Swiss franc and Canadian dollar.
Forex is Decentralised
Forex trading is not centralised in any one place. This contrasts to, for example, trading on a stock exchange. Forex trading transactions can be conducted electronically or over the telephone from practically anywhere in the world. What this means is that forex is a 24-hour market. However, most forex brokers and spread betting companieswill close on Friday evening and not re-open their markets until Sunday evening.
Investment banks, central banks and smaller commercial banks have historically dominated forex. However, it is also open to trading for individual investors as well as other financial market players, such as multinational companies, investment managers, brokers and dealers. In terms of total funds, this helps to make forex the largest global market.
Trading in Pairs
Forex trading depends on your success in determining the future movement of a currency pair. For example, you may think that the US dollar will rise against Sterling. Trading to that effect will result in a profit if this happens, with the level of your profit depending on the original deposit or in case of forex spread betting, the value of your financial exposure, which may exceed your initial deposit. Conversely, you will sustain losses if the market moves against you, with the Sterling rising against the US dollar.
Determining Currency Movements
Determining whether a currency will rise or fall against another currency can depend on a large number of factors. Some of these include interest rates, inflation and central bank interventions; for example, large scale buying or selling of national currencies to boost/lower a currency. Naturally political events can also move the market. As an individual forex trader, you may pick up your information from a range of market or publicly available sources, such as news broadcasts or newspapers, to help you make trading decisions.
As with other forms of financial market buying/selling or speculation, the most difficult part of trading is usually correctly anticipating future market movements.
Technical Analysis & Economic Fundamentals
Two common methods you can use to help you trade the forex markets are technical analysis and economic fundamentals. Technical analysis examines historical price data to attempt to determine future price movements. Technical analysis depends, to an extent, on the assumption that history can be a guide to the future, with prices moving in patterns or trends. Having said that, all traders should be aware that, the past performance of a market is certainly not a guarantee of any future performance.
Economic fundamentals, also known as fundamental analysis, examine price movements from the point of view of global or national economic indicators, political events or social changes. This type of analysis can see prices moving according to external factors.
Spread betting is a leveraged investment option, it carries a high level of risk to your capital and losses can exceed your investment. It may not be suitable for your investment needs. Before making any trades, make sure that you are fully aware of all the risks. Only speculate with funds that you can afford to lose. Obtain independent financial advice where you feel it is necessary.