Forex or FX is the acronym for foreign exchange. Different countries have different currencies. For example, we have in Europe the euro, in the United States the American Dollar. A forex trade or transaction would be a simultaneous buying of the euro and selling the US dollar. This trade is also called going long on the euro versus the dollar. But this transaction dosen’t physically take place until the end of it (when you cash in the profits / accept the losses or you lose all your investment).
How dose it work?
The forex (fx) trading is done usually through a broker or a market maker. As a trader in the forex market, you can choose a currency that you consider it will appreciate in value and make a deal accordingly. For example, if you would have bought 1,000 Euro in may 2009 it would have cost you 1,300 US Dollars. If at the end of septmber 2009 you would have sold the 1,000 Euro, you wuold have received 1,450 USD, and made a profit of 150 US $.
Transaction in the forex market can be made through a broker or a market maker. The orders can be made in just a few clicks, and the the broker places the order in the interbank market to cover your position. All this take place in just a few seconds.
What are the benefits of trading in the forex market?
There are five things that offer unique features of the forex trading.
1. The forex market is open 24/7
Because the forex market is an international market, trades are made every second as long as there is an open market in the world. Trading start with the Australia session, on monday, around 9 AM local time, and ends when the New York market closes, on friday evening.
2. High liquidity
The liquidity is the ability of a financial instrument to be converted into cash quickly and without losing form the price. In forex it means that you can transfer large amounts of money to and from a currency with minimum loss.
3. Low trading costs
In forex, usually the price of a transaction is included in the price. And it is called spread. The spread is the difference between the buying and the selling price in one moment.
4. Leverage
Forex brokers offer to the traders the posibility of using leverage. The leverage is the ability to trade a bigger amount of money then what a trader has in his account. If you are trading with a 50:1 leverage, you could trade on the forex market 50 $ for every 1 $ in your account. This mean that you can control a trade of 50,000 usd using just 1,000 usd.
5. Profit from price fluctuations
The forex market dosen’t have restrictions on the direction of the trade. This means that if you consider that a currency will increase in value you can buy it. Similarly, if you think if will decrease in value you can sell it.