Forex Currency Trading

Written by Jacey Harmon
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With a daily average turnover of over $1.4 trillion, the Forex market is the largest marketplace in the world. Despite this fact, most individual investors don't know what the Forex market is. The Forex market is an electronic global currency exchange marketplace. Historically, the currency market has been dominated by financial institutions--banks or government treasuries--and international corporations. With the advent of the Internet and trading software applications, individual investors have started playing a larger role in this market.

The Basics of Forex Trading

As noted above the Forex market is an electronic global currency exchange. A majority of those involved with the market are speculators. A speculator is one who trades with the sole intention to make a profit. It is estimated over 90 percent of Forex's daily activity is from speculative trading.

When you trade currencies you are simultaneously exchanging one currency for another. This is why currencies are traded in pairs: US Dollar/Euro or British Pound/Swiss Franc. Most of the daily trading activity occurs in the "major" currencies: US Dollar, Euro, Swiss Franc, British Pound, Canadian Dollar, Australian Dollar, and Japanese Yen. These currencies are highly liquid and offer tight spreads and the best opportunity for profit.

You won't pay a commission when you trade in the Forex market. Instead, the cost of the trade is from the spread. The spread is the difference between the asking price and the bid price. For most of the major currencies the spread will be three to five "pips." A pip is the smallest price unit for any currency: .0001. Most currencies are based-quoted--against the US Dollar. A quote for the Japanese Yen of 125 states one US Dollar is worth 125 Japanese Yen. The exceptions to this are the Euro, British Pound and Australian Dollar. These currencies are based against the Dollar. A quote for the British Pound of 1.25 indicates one Pound is worth 1.25 US Dollars. Operating 24 hours a day, the Forex market offers plenty of opportunity to trade.

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