What Is Forex Trading

Currencies can be traded just like any other commodities. In order for this trading to happen, it has to take place in a special environment. This is the foreign exchange market, or the forex market, or simply FX market, as it is called by many players. Here, on the foreign exchange market, banks and other financial organisms make currency trading possible. The trade is done like any other, but you buy a certain currency and pay for it with another one. From the exchange rate variation, you may win or lose, depending on your experience, on your ability to stop before it is too late and depending a big deal on your good fortune. Indeed, forex trading is a very risky business. All FX brokers warn their clients about this.

Who Are The Big Players on the Forex Trading Market?

The biggest currency traders banks belonging to different countries. For example, in May 2008, the biggest foreign exchange trader of all was Deutsche Bank, scoring a bit more than 20% of the total transactions volume. Morgan Stanley came on the 10th position, with only a bit less than 3% of the total transactions. Probably FX obeys the Paretto rule: 20% of the traders make 80% of the volume.

However, even if you buy and sell only a tiny fraction of the total market, for a private person this can mean a lot of money, so in case of a loss you can be seriously affected.

How Forex Trading Market Works?

If you were used to have the same treatment as any other player, like it happens in other stock markets and futures trading transactions, in the case of currency exchange, the players are grouped in access levels. At the top level, there are only the big banks and the central banks of the various countries. Simple players like you and I will never know the bid and ask prices for that segment of the players. As we go down the ladder, the difference between the bid and the ask price is increasing from 0-1 pip to 1-2 pips for currencies such as Euro.

I can hear you asking yourself “what is this pip?”, so I feel obliged to tell you that pip stands for percentage in point and it is the smallest price increment. The absolute value of one pip may differ from a currency to the other. For example, some prices are quoted to the fourth decimal, so one pip is 0.0001. This is the case of USD/Euro exchange rate, which has four decimals. The Japanese Yen is quoted only with two decimals, so in that case a pip would be 0.01.

Stay tuned for our future articles which will explain you in detail the advantages of forex trading, why and how to choose a forex trading broker for your account, what are the most common platforms of online forex trading and a lot more useful information.

Comments (0) • Forex Market • March 2009