Introduction to the Forex Trading As you might know, the foreign exchange market is the largest financial market in the world. There are over $1.2 trillion changing hands every single day. Compare that to the $25 billion a day trading volume at the New York Stock Exchange. In fact, it is three times larger than all of the US Equity and Treasury markets combined together. The popularity of foreign exchange market has accelerated rapidly in recent years as the prospect of 24 hour, high leverage, very liquid trading, has caught the interest of many traders. Before coming the internet age, previously only large corporations, hedge funds, large commodity trading advisors, and other institutional investors which can access this market and do forex trading. However, with the ascendancy of online/internet trading, many firms have opened up to the individual traders, providing leveraged trading as well as fully featured execution platforms, charts, and real time news. What is traded on the foreign exchange market? The answer is simple: money. Forex trading is where the currency of one nation is traded for that of another. Therefore, forex trading is always traded in pairs. Te most commonly traded currency pairs are traded against the US Dollar (USD). The major currency pairs are the Euro Dollar (EUR/USD), the British Pound (GBP/USD), the Japanesse Yen (USD/JPY), and Swiss Franc (USD/CHF). As mentioned before, because there is not a central exchange for the forex market, these pairs and their crosses are traded over the telephone, facsimile, and internet, through a global network of banks, multinational corporations, importers and exporters, brokers, institutional investors, as well as individual traders. Now, almost anyone with a computer and an internet connection can trade currencies just like the world's largest banks do. There are now over 6 million trading accounts worldwide up from only 1.7 million in 1997. Unlike the US currency futures markets, which have fixed daily trading hours, the forex market is a seamless, 24 hour market. At 2 p.m. ET each Sunday, trading begins as markets open for the week in Wellington, New Zealand, followed by Sydney and singapore. At 7 p.m. ET the Tokyo market opens, followed by London at 2 a.m. and New York at 8 a.m. This overlapping movement of currency trading among market centers allows traders to react to news immediately, and also provides the added flexibility of determining their trading schedules. If important news occurs while the US currency futures markets are closed, the next day's opening could be a wild ride. Many currency brokers (dealers) do not charge outright commision fees to individual traders. Instead, they profit from the bid-ask spread they set. As a result, many currency firms promote their low spreads rather than their low commission rates. Whether this is a good deal or not depends on the size of the spread in a given currency. In addition to the market's trading opportunities, foreign exchange can be a solid diversification component in your financial portfolio. Most diversification strategies involve a combination of sector allocation, foreign and domestic equities, and fixed income. Some participants have branched out into precious metals and/or energy products; however, few traders consider expanding into forex. Why? The reason may be in the simple fact that in the US, investors tend to be underexposed to foreign exchange. Unfamiliarity typically breeds misconceptions, and foreign exchange in the US is no exception.
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