Currency trading in simple words

The blog is about one of the biggest financial markets in the world – Foreign Exchange Market. As you probably remember, or maybe know that before 1973 this market did not exist. Changing currencies was not easy at the time and getting good conversion rates too. Most currencies were pegged to gold, some to silver, yet others to a basket of other currencies. Creation of Forex liberated the world from these practices and enabled countries, banks, funds and now individual traders to trade in this market for both economic and speculative purposes. Breton Woods opened the door to one extra market that quickly outgrew all stock markets combined together and even Futures market.

In the spot market you trade one currency against another. For example, if you buy usd/jpy currency pair you automatically buy US dollar and at the same time you sell Japanese Yen. If you sell usd/jpy, you automatically sell US dollar and buy Japanese Yen. There are up to ten currency pairs that traders call: major pairs and over a hundred, which traders call crosses. These are less popular pairs that have smaller volume, are less liquid, but also present good reward opportunities.

There are lots of participants in the market; some have already been mentioned above, some I will probably mention in my future posts.

Brokers who make money by giving opportunity for buyers and sellers to trade make their compensation by means of what we call: spreads. What is spread? It is a difference between sell price and buy price or as we know it between bid price and ask price. In majors, the spread might be as low as one pip during hours with lower volatility and grow to ten pip or more when some Forex news is released. Brokers do not want to lose money and hedge themselves by expanding spreads for a few minutes.

The daily volume in Forex is huge. It can reach around 4 trillion dollars per twenty four hours. No wonder so many speculators are interested in it.

You can participate in the market with as low as one hundred dollars. How is that possible? It is possible because of leverage. What does that mean? It means you will have to give one hundred of your dollars and a bank or a broker will give you one hundred times more. This is called leverage. In such a way just by pledging your one hundred dollars you will be able to operate with ten thousand dollars, or one mini lot. A standard lot is one hundred thousand dollars.

The best part of Forex market is the liquidity. You can open a position with one hundred million dollars and close it in a few minutes.

There are disadvantages too. But I will discuss them in my future posts. Good bye for now.