FX trading (also referred to as Forex trading or foreign exchange trading) involves trading one currency for another. FX trading is the most influential, most liquid and biggest financial market in the world.
FX Trading is performed from 9 p.m. GMT Sunday until 10 p.m. GMT Friday between currency speculators, multi-national firms, large banks, central banks, governments, and individual investors.
You won’t believe the amount of money involved in FX trading. On a daily basis, more than 3 Trillion US dollars in volume are being traded worldwide. It’s the biggest form of financial transaction in the world.
History of the FX Trading
Initiated in 1944, the Breton Woods Agreement was forged in an effort to keep cash from draining out of war-wretched Europe. Currency flows were held to only 1 percent against the US dollar, which was limited to the price of gold at 35 US dollars per ounce.
The modern period of FX trading first came into existence in 1971 with the downfall of the Breton Woods Agreement. The US dollar was no longer convertible into gold and market players were liberalized to scale down foreign exchange rates, heralding a rise in trading opportunities and currency market volatility.
The collapse in 1973 of the Smithsonian and European Joint Float agreements also ushered the real start of the free-floating FX trading exchange system that drives the modern market as we know it today.
How Does FX Trading Work?
The main mechanism of FX trading is not very hard to understand. Each currency has its own exchange rate which is primarily used to convert it into a different currency. A single US dollar can be exchanged into 0.702395167 euro. This currency pairing becomes the USD/EUR currency exchange.
Any person nowadays, who has an internet connection, can take a part in the FX trading market through a Forex broker. Take note that the governing bodies and legal systems such as the US Securities and Exchange Commission usually tends to demand certain compliance and requirements on the FX trading processes, which people must follow.
It is common sense on the part of newbie or expert traders that FX trading does not make you a millionaire overnight. FX trading demands a lot of hard work, patience and dedication. In addition, you must be careful, prudent, and wise before shelling out money to gain profits.
Since the US dollar is used as a barometer for trade and investments, it is sometimes called as the measurement currency. A trader or financial investor basically pours out, say $5 into euros of the same amount and then waits for results.
If the European Union does well financially, then the price or value of invested euros appreciates where the trader can turn the currency into dollars that would enable the FX trader to have gained about say $7. A trader must be well-equipped to understand the complexities involved in FX trading in order to succeed in this global money market.
You can register with broker who deals in FX trading so as to make legal and secure trades in the market. Make sure that you sign up with a regulated Forex broker who has authorization by a regulatory body to receive and transmit your trades. Safe investment however is just about having a regulated broker.
FX trading investors exchange currencies or initiate dealings and trades on the basis of rates given at the time of the trade execution for reasons that might have their sources hinged on speculation which can lead to profit or simply for reasons of having an amount of a specific currency that they need to conduct from their day to day business activities.
Characteristics of FX Trading
The unique features which distinguish online FX trading are solely based on its huge trading volumes, its capacity to have no geographical limits and its ability to offer constant flow of operation from the given period of trading.
In addition, the online FX trading market is very attractive due to the extensive variety of products that are offered and the choices to trade more than 70 global currencies from any remote location around the world.
It also gives any businesses or private entity an account with an FX trading broker that will offer him the service of an FX trading platform coming together with all the added features including banking service, customer service and the ability to manage account options.
FX trading is a high-reward yet high-risk investment. Fortunes can be made and lost every time a currency fluctuates with high volatility and changes value. The small investor is at a disadvantage compared to huge banks and big private financial firms for two major reasons: under-capitalization and wider spreads.
The verdict amongst professional FX trading investors is that somewhere between 85 and 95 percent of day traders lose money and even the majors get in to trouble on occasion. Realistically, a private individual FX trading marketer should only join the marketplace with a minimum of 10,000 US dollar “risk capital,” (i.e. money that can he can afford to lose without causing difficulties, and a good concept of the intricacies involved in the market.)
The nature of the FX trading market means that the smaller the money being risked, the greater the value fluctuation needs to be before a venture becomes successful for any greenhorn or even expert money marketer.