Forex Trading

Forex trading specializes in the movement of currency and investors will find that the Forex market is extremely volatile and holds a lot of liquidity. Once thought of a market only for the wealthy and large companies, the Internet has revamped what investors believed about Forex trading and now all individual investors can take advantage of these lucrative markets. One of the advantages of Forex trading, and a main reason why trading has become increasingly popular, is that all of the trading is conducted over the counter; or through Internet access. The Forex market is simply the changing of currency from one country’s form to another. Exchange rates are continually changing and it is due to these fluctuations that investors are able to gain large profits from the Forex market.

Additionally, investors can use parts of their IRA and tax deferred retirement accounts to invest in Forex. Many investors are limited to investing solely in stocks and mutual funds but Forex trading brings a whole new dimension to building your financial portfolio.

The Forex market offers many advantages, the first of which is the ability to trade 24 hours per day five days per week. Most investors report that the best hours for trading are in the early morning or late at night. As major U.S. stock exchanges are open a certain number of hours per day, the Forex market is available for trading 24 hours, 5 days per week thanks to the global aspect of currency trading. When U.S. markets close, markets in China and Japan are opening, etc.

Another advantage is that you do not need to pay a person a commission for the transaction or deal. You can make your investments on an individual basis, pay the listed price, and not need to worry about paying a broker a commission for his or her part in the deal.

Investors involved with Forex trading use one of three ways to make sales and purchases: spot market, futures market and forwards market. The spot market is defined as a commodities or securities market where currency is sold and delivered immediately. The spot market is based upon current prices that reflect interest rates, political tensions affecting the currency rate, and overall supply and demand.

The futures market is defined as an auction type market where currency is bought and sold then delivered on a defined date in the future. Unlike the spot market that deals with currency, the futures market trades futures contracts that represent public commodities markets. The contracts are settled for cash and are considered to offer less risk than the spot market.

The forwards market deals in the buying and selling for forward contracts. A forward contract is a cash transaction for the delivery of a commodity delivered after the contract has been made. Forward contracts help investors secure the price of a commodity before they have the commodity delivered or in their possession.

Before an investor can successfully begin Forex trading, he or she must learn how to read and understand a currency quote. Forex quotes have the abbreviations of country and type of currency used paired with the amount the currency will buy. Forex trading quotes are referred to as a currency pair. The first number to the left of the equation is referred to as the base currency. This means that the number represented by country and currency will always be the equivalent of one unit. The number to the right of the currency pair is the quote and this signifies how much you can buy with one unit of the base currency. You must also understand the difference between a direct currency quote and an indirect currency quote.

A direct currency quote is simpler as the base currency is always the domestic, single unit and the quote will always be the foreign currency and the quote for the exchange rate. There are no variables with the figures when using direct quotes.

Indirect quotes vary from direct quotes and are written differently from direct quotes. In an indirect quote the numerical figure is listed first, followed by the domestic currency and the foreign currency. The domestic currency means one unit and the first number figure indicates how much of the foreign currency one unit will buy. To determine the figure divide the first number by 1 and you’ll derive the amount one unit of domestic currency will buy in the foreign exchange.

The Forex market holds a number of benefits and risks. It is an exciting way to build wealth but as currency markets are open 24 hours per day they can also see plenty of action and swift, abrupt changes. Understanding how Forex trading works before investing is your best course of action and will help minimize risk as you take part in this exciting investing venue.