According to Andrew Mitchem, this is the most liquid market of all markets in the world. In the forex markets, about four trillion dollars change hands every day. Those willing and have the financial ability to take the trading risks that come with this type of trading can make huge profits. Forex trading has lucrative opportunities because you can trade for twenty four hours a day from Sunday 5p.m Eastern Time until Friday evening 5p.m Eastern Time. Since the introduction of mini forex accounts, ordinary people have been able to trade forex.
How forex markets work
The first thing that you ought to understand is that in forex trading, you are not actually selling or buying anything. As opposed to stock investing, forex trading involves speculation. As a forex trader, you predict how one currency will strengthen or weaken in relation to another. This means that you can buy or sell the dollar simultaneously. It all depends on the currency pairs that you will focus on. You might predict that the dollar will weaken against the yen, but rise against Euro. Under such a situation, you can enter the two positions, and if your prediction is right, you can make money.
Transactions in the forex markets are the same with transactions of trading over the counter. Most people who trade forex go through forex brokers and market makers. These organizations will provide you with the set up for bidding and offering. For you to make money, your prediction about how different currencies will interact needs to be correct. You should also overcome the difference between the offer price and the bid price. If you manage to overcome the spread, then you will walk away with profits. Many market makers and forex brokers make money from spreads. The good thing is that there are no fees or commissions charged on forex trading.
When you use a regular account to trade forex, you mostly work with sizes of lots of 100,000 currency units. The lot sizes, when using a mini account, are smaller, 10,000. In order to magnify your winnings, you can take advantage of leverage. However, you should be cautious when using leverage because it is the same leverage that will increase your losses in the event that your prediction was wrong.
Just like other securities markets, forex trading is based on bid and ask system. After a seller makes an asking price, the buyer will make a bid. For large hedge funds, governments or banks, the spread between the ask and the bid is usually 1 or 2 pips. As a trader you will anticipate which manner the currency exchange rate moves. If you think that the value of a currency will strengthen against another currency, you go long. If you think it will weaken, you go short. You will make money if your guess is right such that the change is above the spread.
By just a click, you can place an order. The broker will then pass the order to a partner working in the Interbank Market. The partner will then fill your position. After closing your trade, your broker will close your position in the Interbank Market before crediting your account with the gain or loss. This can all happen in a few seconds.