The Forex Market

Trading currency is actually very simple when put into perspective. A trader profits from the rise of one currency and the fall of another. The prediction of that one currency to rise or the prediction of another to fall is usually based on some kind of fundamental or technical analysis or simply determined by trends in price movments of currencies. The currency pair as its typically called are the most traded of the currencies and therefore grouped together as such, for example, European or Euro, the British Pound or the Japanese Yen paired together with the US Dollar.

FX Traders can trade these currency pairs in almost any combination with most brokers. The two types of trade categories are reactive and speculative. The reactive trade happens when a trader “reacts” to some kind of political or economic news that occurs of which the market usually reacts very quickly to. A more speculative approach is buying and selling currency in the forex market based on an event expected to happen that would change the markets perception of a single currency. Anticipating the direction of a currency can be both very easy and at times very difficult. It simply depends on what economic conditions are transpiring within a country that have an impact on either one of the two currencies in a pair.

Very small price fluctuations can have a dramatic effect in a traders account because a forex trader trades in lots of $100,000 each of currency. These lots therefore only need a slight fluctation or “pip” in order for a trader to profit or (lose) investment within his/her trade. A pip is considered 1/100th of 1% or one basis point. Just as in the stock market, a forex trader takes a position in a currency trade and capitalizes on a gain in price of that currency in order to sell that postion at a profit. Limit orders can be placed to automatically execute an order once a certain preestablished limit has been reached. This prevents the trader from having to constantly monitor the position 24/7. Stop orders work the same way by automatically selling the position at a chosen price and preventing or limiting loss on a forex trade.

The foreign exchange market is a global market trading 24 hours a day 5 days a week. As an international market, it is traded in many different time zones, all of which may have an impact on the amount of currency traded within certain hours. When financial centers overlap, like London, Toyko or New York, is typically when trading is at its most active. The major dealer centers are New York, London, Toyko and Sydney, all with very different time zones and since political or financial events can happen throughout the globe and any given minute within these time zones, traders must be aware of the impact of a 24 hour market.