This article is about the workings of the forex market and how you should view it.
The forex market does not get the same attention as the stock and bonds markets, although it is the largest financial market. In this trading market, you purchase and sell foreign currencies. The trades are done through various financial centres and not via a centralised exchange as is the case with stocks. This market trades every business working day, all day and night.
Individuals have been able to gain access to the market due to the introduction of suitable technology. In the past, this market was only available to governments, corporate bodies and large financial institutes.
Differences in the Forex Market
- It is possible to trade at any time of day or night due to the long trading hours offered
- You are not limited to the value of currency you intend to buy or sell
- The size and liquidity of the market makes it easy to purchase or sell at any time
- The market has fewer rules. The foreign exchange market is not controlled by a central body as the stocks and options markets are. In recent years, the market has become somewhat regulated in certain countries, but it is still not on the same level as other financial market.
- It is possible for you to make use of insider information to trade. You will not face legal implication as you would in the stock market
- Forex brokers generally do not charge commissions. They earn an income from the difference between the bid and the ask price
- You will not be liable for exchange, brokerage and clearing fees
Earning in the Forex Market
The main reason for you entering this market as a trader is to make money. Your intention is to do this by buying one currency and selling another. The perfect situation is for you to make a profit once you convert the foreign currency into your first currency. For example, if you purchase US dollars and hang on to it for a few days after which time it either increases or decreases in value. You would hope that you will receive more than you initially spent when you sell those US dollars.
Purchasing and Selling
The commodity you are selling in this market is money. Currencies are normally traded in pairs and the quotes you receive will be indicated as USD/SGD which stands for US dollar to the Singapore dollar. Although you are purchasing another country’s currency, you will not receive it in your hands. There is no physical exchange in this market. The trading is done electronically through a range of large banks and institutions. This intricate trading method is called the interbank system.
The forex market is an exciting market to enter. It is quite complex and to trade profitably in this market, it will be necessary for you to go through several steps before you commence live trading. You need to undergo forex training, find a forex broker, implement an effective trading plan and develop a suitable trading strategy. If you follow these steps, you will be prepared to trade profitably.