An Introduction to the Forex market
Learning about the forex marketplace can be quite overwhelming when you first start. The terms used in the field, the basic concepts that govern trading and the sheer amount of misinformation on the internet can cause you to get lost. Its enough to make you quit. I mean if you do not know what PIPs are, what technical analysis means and why margins are important, it can get pretty confusing. However, if you realize how important the Forex market is to you, you won't stop tell you get atleast a basic understanding.
The Forex is the single largest marketplace in the world. It trades in the range of 2 - 3 trillion dollars a day, 6 days a week, 24 hours a day. Simply put, this is where your money is at. Trading currencies use to require large amounts of money to even get into the game, plus only banks had the ability to make trades. So unless you had a lot of money to play with and you had an established relationship with a large bank, you could not trade the Forex. Of course the internet changed all of that by providing direct access to worldwide financial markets through your desktop. Computer technology advances in the late 1990's developed online trading platforms that could be installed on your desktop computer. These programs took advantage of the access provided by the internet and today just about anyone can trade currencies anywhere in the world with a computer and internet access.
This drastic increase in the availability of the Forex to just about anyone willing and able to invest led to a dramatic increase in the amount of money traded in the market. Some estimates suggest that the market's volume went from a billion dollars a day, to one trillion dollars daily! That is a thousand-fold increase in a market that trades nothing but money.
The sheer size of Forex market makes it the single biggest opportunity in history. Of course this also makes it the biggest threat for personal financial ruin. Even with the risks involved, the Forex market cannot be ignored. The importance of the value of currency to your lifestyle demands that you know more about how Forex trading works and hopefully that is why you are reading this article.
The first concept that you must grasp is that while the Forex market involves trading currencies in international capital markets, the overwhelming majority of trades occur without the transfer of physical items. All Forex trades are conducted in pairs of currencies and neither the buyer nor seller is interested in actually taking possession of actual currency. To accomplish this optimal set of circumstances, a Forex trade is actually composed of contracts to buy and sell pairs of currencies at a fixed rate of exchange. This fix rate often fluctuates randomly throughout the course of the day and is established generally by the market itself and more specifically by the broker with whom you negotiate the terms of your individual contract. The size of the Forex market, the amount of people participating in it and the amount of money that is transferred on a daily basis all combine to make the Forex a very attractive place to do business. You can be sure that there will always be somebody buying or selling what you want to buy or sell somewhere in the world and because different countries do things differently, there will always be a good potential for profits.
What I just described can be summed up by the term liquidity. By definition, a liquid asset has the ability to be sold rapidly during market hours and without appreciable loss of value. In the Forex market, your asset would be the currency pair contract that you purchased at a set price. Since the market runs 24 hours a day for 6 days a week, it's almost always open. Also, there are literally millions of market participants buying and selling whenever the market is open and the actual product being bought and sold is, well, Money! With those characteristics, it's not hard to see that the Forex market is probably the most liquid market in the world. This concept of liquidity is very important and is one of the most attractive features of trading currencies. Anyone who has ever gotten stuck with something that used to be valuable that all of a sudden became so valueless that you could not give it away, should understand that power of a liquid market. You will never be in a situation where your asset, money, will not be wanted by someone somewhere. They may not want to pay your price but you will always have the option to cut your losses.
Hopefully, that last paragraph gave you a good idea about the term liquidity and how it relates to the Forex currency exchange market. In my next article, I will be focusing on some of the basic terms used in Forex trading so that you can build a basic understanding of what is going on during an actual trade.
See you next article!
John Q
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