Forex Trading (1)

Forex is an acronym for foreign exchange, a market where people exchange the currency of one country for the currency of another in order to do business  internationally. Typical situations in which such currency exchange is necessary include payments of import and export purchases and the sale of goods or services between countries. Forex is also called the cash market or spot interbank market.The spot market means trading on-the-spot, at whatever  the price is at that moment.

Prior to 1994, the Forex retail interbank market for small individual speculative investors or traders was not available. A speculative investor, or speculative trader, is one who looks to make a profit on price movement in the market and is not looking to hold onto any currency long-term. But with the average minimum transaction size of $1,000,000, smaller traders were all but excluded from participation in this market. Then in the late 1990s, retail market maker brokers (companies that facilitate the trades for speculative traders) were allowed to break up the large interbank units and
offered individual traders the opportunity to participate in the Forex market as we know it today.

Forex is considered the largest financial market in the world. The term market refers to a place where buyers and sellers are brought together to execute trading transactions. More than $1.5 trillion U.S. dollar is traded daily on the Forex. By comparison, $300 billion dollars is traded daily on the U.S. Treasury bond market and $100 billion dollars is traded daily on the U.S. stock market, for a total of $400 billion dollars per day. Forex trades nearly four times that volume daily, exceeding the daily combined activity of all the other financial markets.

Forex has no physical location - transactions are placed via the Internet or telephone - but is composed of approximately 4,500 international world banks and retail brokers. Individual traders wanting to profit by speculating on price changes can only access this market through a Forex broker, such as I-TradeFX.com. It is a good practice of a speculative trader to only deal with Forex brokers that are regulated by the governmental bodies in their respective countries.

Trading currencies involves the fluctuation of one currency in relation to another. That is the main difference between trading currencies and stock trading - you always have to deal with two instruments, or currency pairs, whereas in stock trading you only deal with one instrument. The definition of a currency pair, or currency cross, is trading one currency for another currency, and you need a currency pair to execute a trade on the Forex. Speculative currency trading, just like speculative stock trading, involves exchanging one currency for another in anticipation of a price change in your favor.

There are two types of traders on the Forex: consumer traders and speculative traders. A consumer trader wants long-term ownership and is not as concerned with daily price movements, whereas a speculative trader is only concerned with daily price movement, as that is where the profit potential is. Speculative traders are also called scalpers - they are trying to scalp a profit in a small price movement. Long-term position traders enter the market and stay in for a week, a month, or years. Short-term, or day traders, will enter the market for 5 minutes, 30 minutes, or even 4 hours, and then exit, but they are usually in and out within a 24-hour period.

Although brokers will assure you that Forex trading is commission-free,  it is important that you understand there still are costs involved. That cost is called the spread, which is what you will be charged to get access to the Forex market. The spread is the difference between the buy price and
the sell price of a specific currency.

Envision attending an auction where there are several buyers for a particular item. The auctioneer hopes to sell the item for $10.00 and has asked for bids. One bidder offers $4.00. The difference between the $4.00 bid and $10.00 asking price is $6.00, which is called the spread. As bidding gets closer to the asking price, the spread tightens up. When the bidding gets to $9.95, there is a $0.05 spread, and when the bidders agrees to buy it for $10.00 and the seller agrees to sell it, you have a transaction. There are spreads between all currency pairs that are traded, and they average 3 to 6 price interest points, or pips, on the major world currencies (which are considered to be the U.S. dollar [USD], the British pound [GBP], the Japanese yen [JPY], the European euro [EUR], and the Swiss franc [CHF]). The value of a pip averages about $10.00. Currencies from small countries are called off-brand currencies and can have spreads as much as 500 to 1,000 pips. The broker retains the spread, which is the difference between the buy and the sell price. This is done when a trader enters a trade and upon execution of the trade the spread, should the trade not go your way, is deducted from the trader’s account. Example: If the sell price is 4 pips lower, or $40.00 less, than the buy price, and you buy a currency and immediately go to sell it without any movement in your favor, you would lose $40.00, or 4 pips. To break even, the market would need to move up 4 pips in your direction. To make a profit, the market would need to move more than 4 pips in your direction.