FOREX Trading – What is It and How to Maximize Your Profits
FOREX trading has become a huge buzz word over the past 10 years, mostly because it’s driven many people to wealth with relatively little training, equipment and experience. Similar to its distant cousin daytrading stocks, FOREX trading relies on foreign currency exchanges for profit. Regardless of who you are, you can get into the FOREX exchange market with very little initial investment capital and come out of the other side with huge heaping profits. We’re going to discuss what FOREX exchange markets are, how they work, and the tools you need to get involved.
The foreign exchange market, referred to as FOREX for short, is a global market, with no central positioning that is used to trade currencies. There are centers around the globe which function as the anchors of trade between buyers and sellers. The beauty of FOREX is that unlike the stock market, it is a 24 hour trading market, open 5 days a week (hey, even these guys need a weekend.) The idea of this market is to determine the relative value of currency between different countries. This means FOREX can help assist international trade and investment.
Transactions occur by purchasing one type of currency with another type of currency. So for example, if you have American dollars, it might be beneficial to buy British Pounds when they are weak, and then sell when they have gone up in value. The modern market began forming in the 1970 after restrictions were somewhat relaxed and countries change from fixed exchange rates to floating exchange rates.
The FOREX market is often considered extremely liquid and have traders from every walk of life- from the guy sitting in front of his 4 monitor FOREX trading computer, all the way up to central banks- over 3.98 trillion dollars exchanges hands on a daily basis! Interestingly enough, the United Kingdom accounts for over 36 percent of the daily trades, more than double its next closest competitor, the US at 17 percent.
Since the year 2004, foreign exchange has more than doubled. This includes a more than 20 percent increase since April of 2007. Experts attribute this growth to a number of factors, including the fact that foreign exchange has increased dramatically as an asset class in recent years. It should also be noted that the growth of electronic execution has been a huge reason for the exponential growth as well- leading to a huge variety of consumer types. In 2010, so-called retail traders accounted for around 150 billion dollars per day in currency turn over!
Another factor that has made FOREX so popular is the fact that it’s an over the counter market, meaning brokers and dealers negotiate directly. Because there is no clearing house or central exchange, ease of access is relatively high and encourages many to get involved. There are, however, varied levels of access. They include the interbank market which handles large commercial banks. The interbank market is considered very secretive. The keep tabs on the spread, which is the difference between the bid and the ask prices, however, this information is not shared with anyone outside of the inner circle of these markets. These so-called levels of access are determined by something called the “line” which is the amount of money of money being exchanged. It is worth noting that the top tier interbank traders account for around 53 percent of all trades.
For those of us that aren’t comfortable making the exchanges ourselves, there are investment firms that handle the exchange. These guys will handle large accounts like pension funds and endowments. They use the exchange to simply facilitate transactions between other foreign securities. However, there are some firms that “play” the market in an attempt to profit for their customers.
If you were to get involved in the market yourself, you would be what are considered a retail exchange trader- a fast growing segment of the FOREX market. These are considered speculative traders and are an important segment of the market.
If you are going to trade currencies, one of the most important aspects of your business is the computer that you use. A trading computer is a computer that is specifically designed specifically for the FOREX marketplace. It typically has a fast processor (a Pentium i5 or better), extra RAM or memory (2-4gbs minimum) and a graphics card capable of handling multiple screens. A good example of a trading computer can be found at multi-monitors.com, where you’ll also find experts in the field that can help you determine what you need to get set up. It’s true that if you’re buying a multi-monitor trading computer, you’ll probably spend a little bit more money upfront, but the advantage will be a system that won’t hold you back the same way that a normal computer might. This can be huge, especially as you are learning to read the market and trade efficiently. That’s why I suggest you get a computer that is specifically built for trading. You’ll be happier in the long run.
Hopefully this article has taught you about the basics of day trading. The key things to remember are that because of the lose restrictions and low entry points, anyone can get involved in the FOREX market- you don’t need to be ultra rich to invest in FOREX. You also should be a aware of the mechanical requirements to be involved in the FOREX market. There are a ton of great resources and ‘schools’ online that can teach you the more in depth practices needed to get started, but I hope that this article was able to serve as starting place.
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