Trading Forex

A Basic Forex Transaction

As just about anyone interested in trading forex soon learns once they become introduced to the fascinating world of foreign exchange, a forex trade begins with the simultaneous purchase of one currency and the sale of another. The first currency in the forex trade is generally called either the base or primary currency, while the second currency in the transaction is often referred to as the counter currency. Together, the base and counter currencies comprise the currency pair under consideration for a speculator trading forex to take a position in.

Why Traders Take a Forex Position

Basically, if a forex trader thinks that the exchange rate will rise, they will establish a long position in that currency pair and will do so by buying the base currency and selling the counter currency. On the other hand, if the forex trader instead thinks that a decline in the exchange rate is more likely, they would establish a short position in the currency pair. Such a transaction would involve the forex trader selling the base currency and buying the counter currency.

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Forex Orders

Once a trader has established a position when trading forex, they often wish to enter orders into the market to close out that forex trade position at exchange rates better than the prevailing market. These orders are often termed take-profit orders. The forex trader might also wish to protect their portfolio from excessive losses potentially incurred by the market moving against the forex trade position they have already taken. They would do so by entering an order to close out the position at an exchange rate worse than the prevailing market. This type of order is typically termed a stop-loss order. Often, both types of forex trade orders might be entered along with a stipulation that the execution of one order cancels the other. This would be called a one-cancels-the-other or OCO order.

The Scope and Liquidity of the Forex Market

Trading forex now happens on a global basis and the market remains largely unregulated, and a forex trader can enter a transaction or place an order around the clock. Furthermore, the forex market’s center of focus shifts as the respective business days progress among the major global money centers which include: London, New York, Tokyo, Sydney, Auckland and Frankfurt. In addition, those trading forex are participating in the largest financial market in the world, where, in terms of forex trade volume, approximately $2 trillion worth of transactions are done each business day on average. This makes forex an especially attractive marketplace for speculative traders to participate in.

The extraordinarily high transaction volume seen in the forex market also results in the substantial liquidity typically observed when trading forex. Increased liquidity in a particular currency pair means that more professional market-makers participate by supplying two-way prices to the market, and usually at tighter bid/offer spreads, than in less well-serviced currency pairs. A market-making forex trader, who typically works at a major commercial bank, can profit substantially from having their wider spread paid in a less liquid currency pair. Nevertheless, a personal forex trader paying that same larger bid/offer spread when trading forex will be incurring significantly higher transaction costs when they enter or exit a position.

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Common Currency Pairs

Trading Forex Online

Finally, recent technological advances in trading forex have greatly facilitated the ability of a personal forex trader to execute a forex trade online using considerable leverage and in amounts that suit their portfolio’s size. As a result, the door to this huge but once-exclusive market has now swung wide open to participation by such smaller speculators who can now access and profit from the exchange rate movements seen in this global financial marketplace.