What is Forex Trading?
What is Forex? This is a question I get asked all the time. Usually when I meet new people and I tell them what I do, they, have no idea what Forex trading is. It’s quite surprising considering just how big Forex is.
With over $5 trillion traded daily, it overshadows all other financial markets.
Simply put, Forex is an abbreviation of “foreign exchange”. When one currency is changed for another, it is a Forex transaction. Those currency exchange booths at the airport. When governments import or export goods. Even when you buy something online from another country.
These are all foreign exchange transactions. A huge amount of transactions occur every day – that’s why Forex’s daily turnover is as high as $5 trillion.
A large portion of the daily volume traded through Forex is speculative. Speculation is what you are doing by trading on the Forex market.
You picked a great market to trade. Forex trading is unlike any other financial market in the world:
- 24 hour trading, 5 days a week
- The ability to profit in rising or falling markets
- Leveraged trading with low margin requirements
What does this mean for you?
Forex is a great path for those with limited time to trade. Other financial markets are extremely time demanding, whereas Forex is tradeable for more hours. You can trade when you get home from work or fit it around a busy schedule.
There is also the benefit of leverage, which enables you to earn much more money per trade. However, the flip side is that you can lose a lot more per trade. So it is very important that you are prepared to trade before you trade with real money. There are some tools we can use to help with all this, such as the trading and money management plan.
Why isn’t Forex as popular as the Stock Market?
Forex has existed since ancient times. The Romans used to carry out Forex transactions regularly.
So why is Forex trading not as well known as stock trading? Forex has been around for thousands of years after all.
Well, Forex trading hasn’t always been this accessible for traders like you and me. Personal computers revolutionized Forex trading accessibility – it has only been tradeable on a retail level for the past 20 years. Stocks, on the other hand, have been traded at a retail level for almost 100 years.
So, even with Forex being centuries old, retail trading of Forex is relatively new!
Where Is Forex Located?
The U.S. stock market is located on Wall Street. The London stock exchange is at 10 Paternoster Square. Where do you think Forex is located?
The answer is nowhere!
Forex has no central location. It is not dealt across the trading floor like stocks. Trading is conducted 24 hours per day through Electronic Communication Networks (ECNs) in various markets across the globe.
An ECN is the computer system that facilitates the trading of financial products. The Securities and Exchange commission authorized the creation of ECNs in 1998.
The Forex market does not need a physical location because it is traded through this system.
You may have heard that London is the global centre of the foreign exchange market. That is because London accounts for close to 35% of all trading. That’s double New York’s 17%!
So, even though the Forex market has no location, the global centre is regarded as London.
You should have a pretty good idea of what Forex is now. If somebody were to ask you “What is Forex?”, I think you would give a good answer at this point. If you are interested in finding out more about the Forex market, check out this wikipedia page.