What is Forex trading?
The term Forex trading refers to the buying and selling of currencies that belong to different nations, where simply one currency is bought and another is sold at the same time. We say a profit is generated when we sell a currency at a price higher than the cost we paid to buy that particular currency.
The forex market is the largest liquid financial market in the world in terms of turnover, with an average daily turnover of over $5 trillion, according to the Bank for International Settlements triennial report of 2016. 85% of the daily transactions involve trading of the major currencies. With the advent of technology and artificial intelligence, it is now possible for small traders to gain the benefits of Forex trading, by means of various online trading systems. And this modern technology has led to a whole new world of algorithmic trading which will be discussed later in detail.
Forex trading involves trading the currencies in pairs like Euro/Dollar, Dollar/Yen, etc. From an investment perspective, only the major four currencies are used as they are relatively safer bets. They are as follows – US dollar versus Japanese Yen(USD/JPY), Euro against US Dollar (EUR/USD), US Dollar against Swiss Franc (USD/CHF)and British Pound against the US Dollar (GBP/USD). Out of these pairs, EUR/USD is the most liquid currency pair. There are several major Forex Brokerage companies where dealers get to perform transactions on the foreign exchange market. Forex market is an integral part of the world economy and is active 24 hours a day and 5 days a week (Monday to Friday). Even while you are sleeping, transactions in foreign exchange occur in different parts of the world.
Is Forex trading for you?
Since Forex is the largest financial market in the world, its price movements are very smooth and stable when compared to the stock market. In the past, small investors were unable to enter into this market because of the stringent margin requirements and large minimum transaction sizes. But now new investors can enter and exit their positions easily.
The main dealers in this field are banks, large speculators, big currency traders etc. Only they could benefit from a strong trending nature of currency exchange rates and currency market’s unmatched liquidity. Today, people with the smallest account sizes also get to buy and sell any number of smaller unit sizes as FX brokers are offering them to trade that lot size.