A Truly International Market

With more than $2 trillion traded daily, the foreign exchange market, or forex, is the largest and most liquid market in the world – dwarfing the size and liquidity of the U.S. equity and Treasury markets combined. In the end of 90’s, forex market was the exclusive domain of large banks and institutions. Only high net worth individuals were able to trade in this market through a bank, which required a substantial amount of cash deposit backed by millions of net worth. On average, brokerage firms asked a lower minimum deposit of $250,000.

Thanks to the ubiquitous computer and the development of online trading platform – which now allow virtually any individual to trade with the major players in the market – the growth of forex trading has been unprecedented and continues to be unequaled by any other market, unlike other financial markets that operate through an exchange, the forex investors interested in the currency trading. A lot of people are coming from equities and futures. Currency are always priced and traded in pairs, such EUR/USD or USD/JPY. So when trader buys one currency, he or she is simultaneously selling another. For example, if he believes the value of the Eurodollar is going to increase relative to the U.S. dollar, then he or she would buy the Euro in the Euro/U.S. dollar pair. If the currency he purchased increases in value, then he or she has to sell the currency back in order to lock in the profit.

Since the U.S. dollar is the world’s dominant currency, it’s usually considered the base currency for quotes. As a result, quotes are expressed as a unit of $1 relative to the other currency quoted in the pair. The exceptions are the Euro, Britain pound, and Australian dollar, which are all quoted as dollars per foreign currency. Currency is traded on a pip system, which is another word for a point in the currency-trading arena. In order to make money, traders have to capture points. Depending on the currency, each point is worth a different amount. For example, say that the British pound is worth about $10 per point that is traded per lot. If an investor trade one lot and capture 40 points, he has made $400. If he trade 10 lots and captures 40 points, he has made $4,000. Like all traded financial products, currency trading involves a bid/ask spread, which represents the price at which a traders’ counter-party is willing to trade. Moreover, as is the standard practice in over-the-counter currency trading, dealers don’t charge commissions or transaction of Daniels Trading, a commodity futures and option brokerage firm. “But by giving people up to 200:1 leverage, they’re really just giving you more rope to hang yourself”.

A trader/investor should start with sufficient amount of capital and set a limit on exactly how much money he is willing to risk. In addition, the investor should monitor his margin balance on a regular basis and utilize stop-loss orders on every open position. (Stop loss order prevents risk by locking in profits and gains.)

Trade in forex, try this trading platform

Foreign Currency MT4 Trading Platform