The foreign exchange market is a type of investment trading platform. The forex market is built around the exchange of foreign currencies, and in the forex market, currencies are considered the asset class. Foreign exchange trades allow individual traders to make a profit by buying and selling currencies against the natural fluctuations in value between two currencies. While foreign currency trading is certainly nothing new, having existed nearly as long as there has been the need to trade internationally, it has only recently become viable for individual traders to make a profit from it without ever needing to travel.
In the past, the exchange of currencies was limited to banks on behalf of their clients. For example, if a business was operating internationally, and needed to exchange some of their money for the local currency. However, over time, realizing the potential of foreign exchange trading, banks began to develop proprietary desks in order to trade their own assets with other banks internationally. Over time, this evolved into large international corporations trading in addition to banks, then hedge funds and wealthy individuals. However, forex trading remained exclusive to the fantastically wealthy and was locked off to the average investor. At least, until the internet happened. Market gbp With the global adoption of the internet, the emergence of an Internet-based forex market soon followed, allowing anyone to trade on the foreign exchange market.
Unlike the stock market or futures market, which requires a comprehensive understanding of companies, the industry they’re built around, the current financial and managerial status of the company, as well as macroeconomic factors, the forex markets only require the latter, as they are macroeconomic in nature, as opposed to the microeconomic nature of stock or futures trading. The high-level macroeconomic nature of the forex market makes it significantly easier to grasp for some traders and allows them to focus more on the big picture, without being forced to deal with the multitude of nuances that are present with other investment trading platforms.
The foreign exchange market is the largest market in the world, boasting both the largest number of trades by pure volume and the most liquidity due to the currency-centric nature of the market. The immense size of the market and the robust infrastructure that supports it allows a trader to enter positions or exit them in only a fraction of a second when trading any one of the world’s major currencies. An additional benefit of the forex market, when compared to the stock or futures markets, is that the foreign exchange market is global in nature, and with the Internet-based infrastructure behind it, supports trading 24 hours per day. The day starts in Australia each day and then ends the day in New York, the markets opening and closing around the world in a revolving cycle, allowing traders to work at any time of the day.
When it comes to foreign exchange trading, it’s not all sunshine and roses though. There are risks, as with any market, and some tools are more dangerous than others, such as it is in the case of leverage. A powerful tool for the savvy trader, leverage allows traders to control positions which cost more than they have. A leverage rate of 10:1, for example, would allow a trader to control $1,000 in currency with only $100 in their account. This has the potential to vastly increase gains made by a trader, but it offers the same potential to losses, and novice traders often find themselves quickly emptying their wallets trying and failing to properly utilize leverage. When it comes to foreign exchange trading, your greatest enemy is yourself, and if your emotions get the better of your judgment, common sense, and market research, then it can cost you. You should always start small until you’re comfortable trading larger sums, especially regarding leverage.