An Introduction to Forex Trading

In 1971, foreign exchange currency rates switched from being fixed to floating and a new market opened up. The currency conversion rates between two countries were now subject to the trading volume between them and their respective market dynamics. Since then, foreign trade and therefore, foreign currency exchange trade has grown by leaps and bounds, reaching a turnover of USD 3.2 trillion in 2007, with a 71% increase since 2004. This type of trade became a new business opportunity which exploited the volatility of the exchange rates for profit.

Today, the foreign exchange market is not only the biggest international trade market, but is also the longest running, operating 24 hours a day, except weekends. This makes it more sensitive to international events and therefore more responsive to market changes.

Learning forex trading is about learning how currencies are exchanged and it requires an in-depth knowledge of economic developments in the international markets, as well as domestic markets. The fundamentals are simple, but acquiring mastery over trading requires years of experience. Trading in this market is usually done on the phone and nowadays, largely on the Internet. You can trade from anywhere in the world. All you need is an Internet connection, a decent capital investment, and a willingness to learn. The cost of operation through the Internet is lower and also faster, compared to traditional methods.

Learning Trading

Trade in all forms is the buying and selling of goods. The principle on which it operates is ‘buy cheap, sell dear’. Forex trade is unique in the sense that there are no goods sold here, only currencies are swapped, one for the other. The principle of operation is the same though, ‘Buy a currency as cheaply as possible and sell it when it improves in value’ or ‘sell a currency at a price and buy it back cheaper when its value falls’. The former kind of transaction is called a ‘long position’ while the latter is called the ‘short position’.

There are many online brokerage companies that operate and provide the platform for trading currencies. Firstly, get in touch with the trading jargon. It takes a bit of time to learn, but once you get used to it, the operation is simple. The main thing is to understand the factors that affect the currency trading prices, which are the markets, central bank policies, and international trade. You could call the whole thing a very advanced form of betting. You make choices based on informed guesses and hope for the best. The choices need to be made through a deep understanding of how a particular currency is going to respond to market dynamics.

You could start out with a practice account, in which you do not actually trade, but get used to the procedure of online trading. Read charts, make calculations, and place virtual buy and sell orders, before you start doing it actually.

Another exercise you could do is follow and read the currency trade news in financial papers. They provide a daily quote and analysis of the exchange rates or you could get the live quotes online. Make your own virtual transactions, based on the data. Make a table of your virtual profits and losses. Once you start beating the markets confidently on a regular basis, make a real investment in the market.

Brokerage sites provide you with software programs and online tools for analysis and a forex account. You can start trading from the comfort of your home. Alternatively, you could enroll for training, which will give you the depth of knowledge and grasp of fundamental principles.

What you essentially do is trade between pairs of currencies which are listed in the order of their market value. Online trading is mostly ‘direct exchange’ of currencies, which holds USD 1.4 trillion of market share.

Types of Transactions

There are many ways in which forex transactions can occur, differing in volume and time of transaction. They are:

Swap: The most common type of transaction that happens in forex markets, swap is an exchange of currencies for a previously decided period of time, followed by reexchange by mutual agreement. These dealings do not happen by contracts. These transactions are most common in the market.

Spot: As the name suggests, spot transaction is an exchange of currencies done in the shortest time, usually 2 days and in cash. Interest rate is not applied in the transaction. It is a direct exchange transaction between two currencies. This is the second most common transaction after swap.

Forward: Forward transaction is an agreement between a buyer and seller to purchase or sell a currency at a predestined future date by mutual agreement. The set time period may vary from days to months. These types of transactions reduce volatility risks.

Future: This is another type of forward transaction, but with a formal structure decided in the market. The buying and selling date is set for, up to 3 months in the future and interest is inclusive in the price.

Option: A derivative type of transaction is option or FX option, as it is called. In it, the buyer and the seller agree upon a future date for exchanging currencies. Although, the seller has a right to sell at that predestined date, he has no obligation to do so. This is a more flexible option than ‘Forward’ or ‘Future’ transactions.

You have an option of getting your account managed by a professional brokerage company, but it is very important that you understand what transactions, the firm is making for you. Ultimately, it is your money and you have to be responsible for it. You could also start your own brokerage firm, once you think you have a good understanding of forex transactions and your success rate is higher.

One advantage of the direct exchange forex market is that liquidity is not a problem here. The market deals in liquid assets that is currency. Make sure that after you have invested in the markets, you have a backup plan and some savings other than these investments. Do not place all your eggs in the same basket. It is a hectic form of trade and you need to be in touch with the market pulse all day. Still, if you think you have got the patience and the tenacity to deal with volatile markets, you are in for some big bucks and this is a good career opportunity for you.