What is Forex Currency Trading?

What is it?

The global foreign exchange market is the largest market in the world with more than $3 trillion daily turnover - dwarfing the combined turnover of the world's stock and bond markets. The liquidity and competitive pricing available in this market are unsurpassed, and today with the irregularity in performance in other markets, the growth of foreign exchange trading, investing and management is accelerating.

Who trades?

Online trading, web-based research and analysis combined with competitive pricing have made the market more accessible. Hundreds of thousands of informed individuals, businesses and investment funds actively trade FX.

Why trade?

More recently, private investors and individual traders have entered the market for global currency as they discover the advantages of:

• Trading leverage
• Market liquidity 24 hours a day
• Commission free, very low dealing costs
• Dynamic movement and opportunities for profit

Aggressive investors are attracted by the volatility of the foreign exchange market and the opportunity for substantial profits, particularly when using leverage.

Margin Trading

Foreign exchange trading is normally undertaken on the basis of margin trading. A relatively small collateral deposit is required in order to initiate much larger traded positions in the market. When trading the main currencies, GO Markets requires margins from 1% with 2% being the average.

For example, in order to trade $1 million, an investor is required to have $20,000 as collateral in his or her account. As a result of such a margin deposit, the investor may obtain gearing of 50 times and a change of 2% in the underlying value of a trade will result in a 100% profit or loss on one"s deposit. Margin trading clearly demands a disciplined approach.

Trade Currency and Price Currency

A trade requires two currencies (a cross) in which one will be a long (bought) and the other, a short (sold) side. This means one is speculating in the prospect of one of the currencies appreciating in value against a relative weakening of the other. The trade currency is often the one with the highest value. When closing the position, the opposite trade is performed. The profit or loss will be apparent in the difference of the amount of dollars credited and debited for the two transactions. Dollars, in this case, is the price currency.

GO Markets will automatically exchange your profits and losses into your base currency.

Stop-Loss Discipline

There are significant opportunities and risks involved for investors in the foreign exchange markets. Aggressive traders might experience daily profit/loss swings of 20 to 30%. This calls for strict stop-loss policies in positions that are moving against you.

Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours, other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets. Equally, there is a lower risk of being caught without the possibility of closing out one's positions.

Protective Stop-Loss Controls

For speculative trading, we would always recommend the placement of protective stop-losses. Using the MetaTrader platform, investors can easily place and change all orders, including up to three contingent trade orders for each trade while watching developments in the market in real time. These contingent orders comprise two slave orders placed on an If Done basis if a primary order is executed. The two slave orders are themselves related as OCO orders allowing you to define both a profit taking and a stop-loss order around the position if the primary order is executed. If one of the orders is executed, the opposite order will be cancelled automatically.

Dealing Spread, but No Commissions

When trading foreign exchange, investors are quoted a dealing spread which offers a buying and selling level for the trade. When the investor accepts the offered price and receives a confirmation, the trade is done. There is no need to call an exchange floor.

The dealing spread for major crosses is typically 1-3 points depending on market conditions, e.g. USD/JPY 119.40-43. This would mean selling US dollars against the Japanese yen at 119.40 and buying at 119.43.

Spot and Forward Trading

When trading foreign exchange, investors are quoted a spot price. This means that if no further steps are taken, the trade will mature and be settled after two business days. If required, however, the spot trade will be automatically swapped forward with the prevailing rate for maturity the next business day, every trading day, until the position is closed. This can be undertaken on a daily basis or for a longer period.

Investors may also swap their trades forward from a few days up to several months depending on the timeframe of their chosen investment strategy. Although a forward trade is for a future date, the position can be closed out at any time. The closing part of the position is then swapped forward to the same future value date.