What is Forex Trading, How Does it Work, and Its Benefits

by on August 30, 2010

The Forex trading is one of the most prominent markets these days. Most of the people turn to forex trading because of the lump sum money involved, which can turn them into millionaires/ billionaires in a short span of time.

Trading of currencies between various countries in competence with each other is known as Forex Trading. It’s an acronym for Foreign Exchange. For e.g.  European currency in circulation is known as the Euro (EUR) and the U.S. currency is referred to as the US Dollar (USD). A good example of forex trade is buying the Euro whilst concurrently selling the US Dollar. This is termed as going long on the EUR/USD.

How Forex Trading Works?

Forex trading is usually carried out through an agent/broker, who is also known as the market maker. A forex trader chooses a currency pair that is expected to change in value and places a trade accordingly.

You can place an order by simply making a few clicks and later on your broker will pass it on further to one of his partners in the Interbank Market to fill up a position for you. Once you decide to terminate your position, the broker will close the position for you on the Interbank Market and your loss or gain is credited to your account.  All this is done barely in a few seconds.

Benefits of the forex market trading

1. 24 Hour Market: because the forex market is global, trade is carried out constantly; provided that some market is functional around any corner of the world. Trading is started when the markets open in Australia on a Sunday evening, and it closes after the markets in New York windup on Friday.

 

2. High Liquidity: Liquidity is the facility of an asset to be transformed into currency speedily, without any price discount. In forex, this is the best way to transfer large sums of money of foreign currency with nominal price movement.

 

3. Low Transaction Cost: The cost for a transaction is built into the price, which is characteristically prevalent in forex trading. Termed as the spread, it is the variation between the exchange prices.

 

4. Leverage: Forex Brokers permit traders to operate the market by means of leverage, which is the capacity to buy and sell extra money in the marketplace than what really lies in the trader’s account.

 

5. Profit Potential from Rising and Falling Prices: The forex market does not have any limitations on directional trading. This means, if you sense that a currency pair is going to augment in value; you can buy it or just go long. Likewise, if you believe it could decline in value you can sell it, or just go short.

 

Forex Trading is a rage with the investors and the speculators, these days. Thus, if you want to make a huge sum of money, it is advisable to keep a close watch on the market, as this is the easiest way to make some easy bucks in no time.

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