The foreign exchange market, also referred to as the currency market, FX, or forex, is the exchange on which currencies are traded, and is the largest, most liquid market in the world. Buying and selling one country’s currency for another is forex trading.
For instance, the United State’s currency is the USD (US dollar ) while the currency in circulation in Europe is the EUR (the euro). You may want to purchase the US dollar while at the same time selling the euro. This is referred to as going long on the USD/EUR.
Trading the FX market is usually done through a market maker or online broker. When you are investing in the forex you can select a pair of currencies that you predict will fluctuate in price and trade according to your predictions.
How Forex Trades Are Placed
Trades in the currency market can be executed with a market maker or online brokerage, and orders can be made from your computer in just a few clicks. Your broker then places your order with a partner in the Interbank Market in order to fill your order.
At the close of a trade, your broker will close your position on the Interbank Market and then will credit your account with a gain or a loss. All of this can occur very quickly, often in seconds.
Benefits To Investing In Forex
There are several benefits to trading the forex market including the ability to trade twenty-four hours a day from the market open on Sunday evening in Australia and ends on Friday after the New York markets close.
The forex market also benefits from high liquidity, which is the power of an asset to be turned into cash rapidly and without a reduction in price. In the foreign exchange market, this means that large amounts of capital can be moved out of an into foreign currencies with the minimum price movements.
The currency market also offers low transaction costs, which are usually factored into the price. This is referred to as the spread, which is the difference between the buying price ad the selling price.
Foreign Exchange brokers offer investors the ability to control more money than what they actually have in their account using leverage. By trading with 100:1 leverage, that would mean that you would control $100 for every $1 in the account. This ability comes with its own set of pitfalls and cautions, and consider the risks of leveraged investing carefully before committing any capital.
There are also no restrictions on directional trading in the forex market. This means that you can go long a currency that you thing will rise in value, or short a currency you think may decrease.
Types Of Orders
As in the stock market, a market order in the currency market is the order that is executed on the market, live at the latest price. Market orders may be used to close or open a trade at the current market price.
A limit order is normally used to close a position for a realized gain. The limit order will be higher than current market price if you are going long, and lower than market price if you are going short. With a limit order your position will close at your target price for your realized profits.