The World Foreign Exchange market is by far and away the largest financial market in the world, turning over a vast $2 trillion a day. Often referred to as “Forex” or  “Spot Trading”, foreign exchange trading’s nearest rival as far as turnover concerned is the  New York Stock Exchange and that turns over a mere $25 billion a day, representing 25% of Forex’ s volume.  

What makes Forex trading so appealing as an industry is its spontaneity and because it is much easier to understand than trading in Stocks and Shares. While there may be thousands, if not tens of thousands, of stocks being traded around the world every day, there are just a few dozen potentials of Forex trades to be made. Forex trading describes the trading of a pair of currencies and the profit to be earned, by correctly forecasting if one of the currencies rises against the other. Forex trades are always conducted through either a broker or a dealer.

Forex trading, by nature, is a no-frills operation, because it can be very fast-paced. Forex traders are faced with very few fixed overheads, certainly when compared to those who trade in the stock market.  For example, a forex dealer will never be a asked to pay the following:

  • commissions,
  • clearing fees,
  • exchange fees,
  • government fees,
  • Brokerage fees.

 

Brokers who handle foreign currency transaction earn their profits through the bid-ask spread. The bid-ask spread describes the minute difference in liquidity of one currency to another, which varies from minute to minute, if not second to second.  The bid-ask spread in the currency market is one of the smallest (one-hundredth of a percent), and brokers earn their profits by taking a margin of bid-ask spreads out of the tens of thousands of transactions they may handle in a single day.   

Unlike the stock exchange, a trader does not have to feed layers of middlemen before he can make a profit.  In the spot currency market, there is no room for middlemen, as there is no margin or time to deal with them. Transactions need to be in real time, and a split second wasted can mean the difference between profit and loss. That means dealing directly with the market figures responsible for setting the price on a particular currency pair at a very particular point in time.

In Forex trading, despite, or possibly because of, the huge scale of the market, dealers are not restricted to handling a minimum or fixed lot size. In spot Forex dealing, lot sizes, as they are known, can be as low as $250, although it is not financially viable to deal in such low figures.

Dealers are usually charged a maximum of 0.1% commission on their transactions, and if they are dealing in volume, then the percentage they are asked to pay of the bid-ask spread can be as lows as 0. 7%.

For those of you who suffer from insomnia, then the Forex market is for you. Foreign currency trading is always going on somewhere in the world. That is the reason why many Forex dealers can work on a part time basis, channeling their efforts and building their experience around a certain market which operates when they have time available. 

Many potential dealers are nervous about entering the Forex industry because they fear that they may be undercapitalized.  Understanding the machinations of the foreign exchange markets is to understand the meaning of the word leverage. Leverage is where Forex brokers provide their clients with the ability to finance trades at a level of up to 200 to 1 of their capital. In other words, a Forex trader only needs to invest $50 of his own money to trade $10,000 worth of currencies.  However, should the currency swing badly against the trader, then the broker will call the trade and the capital will be lost.  If handled properly, the advantage that leverage can bring to the trader is considerable, meaning the difference in making profits, while preserving risk capital.

The Forex market by nature is both dynamic and liquid, meaning that dealers have to be on their toes at all times. Trades can take minutes to reach a conclusion, successful or otherwise. Dealers in the know have learned to take advantage of the many software programs, known as platforms, which provide them the ability to automate  their trading positions. That means closing their position when they have reached their target profit level (a limit order), or cutting losses if a trade is going the wrong way (a stop loss order).

Not everyone is born to be a Forex trader and the industry realizes this. So much so, that they offer newcomers the opportunity to fabricate a trading situation, without the need to deposit any money. The dealers are given access to charts and breaking news, with the hope that they will learn the rudiments of Forex trading or reach the conclusion that it is not for them, before the lesson costs them real money. 

Free “Demo” Accounts, News, Charts, and Analysis: Most online Forex brokers offer ‘demo’ accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with play money before opening a live trading account and risking real money.

On the same subject, nobody should need to sell the house or the car to become a Forex trader, since it is possible to start off in the industry with a token sum of money. Brokers will open accounts for as little as $300, and will not complain or look down on a trader who deals with such minuscule sums of money. However, the profits that will be earned will also be minute, and will certainly not justify the time spent on learning and researching this vast and ever-changing market.