What is Forex Trading And How Does It Work?

What is Forex: FOREX or the Foreign Exchange market, refers to an international exchange market where currencies are bought and sold. The Foreign Exchange Market began in 1970's, when free exchange rates and floating currencies were introduced. The price of one currency is against the other is determined by the participants based upon the supply and demand for that currency. 

Characteristics of Forex Market: FOREX market has some unique characteristics which are unlike other trading avenues like the stock market.

• It is it is one of the few markets which are free of external controls and manipulations.
• It is the largest liquid financial market.
• Traders are able to open and close positions within a few seconds as there are always willing buyers and sellers, so there is high liquidity.
• A variety of investors are attracted to this market. Investors find many reasons for entering the market, some as long term hedge investors, while others seeking to acquire large short term gains. Unlike blue-chip stocks, which are usually attractive only to the long term investor, the small daily fluctuations in currency prices create an environment which attracts all kinds of investors.

How the FOREX Market Works

The transactions in foreign currencies are not centralized in a particular exchange, and thus take place all over the world via telecommunications. Trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). There are traders available at almost all times and in all in time zones around the world. After deciding what currency the investor would like to purchase, he or she does so through one of these dealers. Investors can also speculate on currency prices by getting a credit line and vastly increase their potential gains and losses. This is called marginal trading.

Marginal Trading

Marginal trading means trading with borrowed capital. Investors can speculate on currency prices by getting a credit line and vastly increase their potential gains and losses. This is called marginal trading. Investments are made without a real money supply. This allows investors to open bigger positions with a smaller amount of actual capital.

Types of Investment Strategies

The two fundamental strategies in investing in FOREX are Technical Analysis and Fundamental Analysis.

1. Technical Analysis: This is a method of analyzing past price trends of a particular currency, in order to forecast where it will move next. The idea of technical analysis is that everything which happens in the future is a function of what has happened in the past. The investor bases his investments upon three fundamental suppositions. These are: the movement of the market considers all factors, the movement of prices is directly tied to these events, and that history repeats itself. Most small and medium sized investors in financial markets use Technical Analysis. 

2. A Fundamental Analysis: Fundamental analysis analyzes the current situations in the country of the currency, including such things as its economy that includes the interest rate, unemployment level, inflation rate etc, and its political situation.