Forex Trading: What it is and How it works

Forex trading is related to trading of various currencies against each other. Basically Forex is used as an acronym for Forex Exchange. The Forex Market has an impressive huge trading volume, that makes the Forex Market the largest, most liquid financial market in the world. In fact in the Forex Market are moved, everyday, more money than you might think: we are not talking about million, nor billion, but trillion. Last year (2013), a new record was made: in one day were moved, something like, $5.3 trillion in the Forex Market.

The Forex Market is quite different from the Stocks Market. For example, it is a market that is never closed: it is not like the Stock Market, where you can trade only during the day and for a limited time (From the opening to the closing of the Stock Exchange: an average of 8 hours a day in which you can trade, during the week). In the Forex market, you can trade 24 hours a day during the week (Because during the weekend is closed, as the Stocks Market).

Moreover, an unique aspect of the Forex Market is that there is no central marketplace for foreign exchange. Instead of having a central exchange (As all the Stock Exchanges of every Country), currency trading is conducted electronically: all the transactions occur through computer networks between traders around the world. In the past, the Forex Market was “populated” only by large financial institutions, corporations, banks, hedge funds and so forth; but thanks to the emergence of Internet and Computers, everything is changed and nowadays anyone, with an internet connection and a computer, can trade currencies in the Forex Market.

But saying that anyone can trade in the Forex Market, it does not mean that anyone is able to do it in a profitable way. If you are already in the Forex Market, you will probably know that normally, the 90% of traders are not making profits from their trades. Why this? Because a lot of traders, especially the newcomers, believe that the Forex Trading is an “easy thing” (As a lot of advertisement from some Brokers, unfortunately, usually say). Or because people that begin their career as trader (Because, yes, being a trader can be a full-time job) don’t have the proper knowledge and they trade following their “feelings” (Thus not in a rational way). Or even because the don’t have a good Money&Risk Management strategy.

The “average” Trader (That is not a large financial institution or an hedge fund) to be able to trade currencies, need the support of a Broker. A broker is an individual or a firm, that acts as an intermediary between the Traders and the Financial Market. In other words, the broker’s prime responsibility is to bring sellers and buyers together and therefore a broker is the third-person facilitator between a buyer and a seller. Brokers also can furnish market information regarding prices, products and market conditions.

Nowadays, you only need an internet connection and a computer, to be able to open an Account with a Forex Broker. Brokers work primarily online, so that anyone can open an account with them without problems. Moreover you only need a little (That sometimes is too little) deposit to your account, so that you will be ready to trade currencies through the Broker.

Lastly, another feature of the Forex Trading, is the “Leverage”. For those who do not know the concept of leverage in the Forex’s World, just think to a normal lever. Through a lever we can lift heavier weights than usual. Same behavior has the leverage in the Forex Market: leverage allows traders to move great amount of money using a small amount of money. Thanks to the leverage, traders will be able to increase their earnings but at the same time, to increase the potential losses.