Online currency trading, the newest and most exciting development in the investment world, is a relatively recent phenomenon that owes its existence solely to the Internet. The foreign exchange currency market, or forex as it is commonly known, used to be the domain of governments, big banks, multinational corporations and hedge funds. It is the largest and the most liquid financial market in the world, with approximately $1.9 billion in trades taking place daily. Online trading technology has now brought the foreign exchange into the province of individual investors worldwide.
Forex Trading Background
The original purpose of the forex was to enable governments and businesses to deal effectively. They could purchase goods or services in the currency of a foreign nation and then exchange the profits into their home country’s currency. Speculation in the currency market grew to the extent that today, ninety-five percent of the trades taking place are for-profit.
The forex operates as a twenty-four hour a day interbank, OTC (over the counter) market, with trades taking place six days a week. The term interbank market indicates no central exchange location; forex trades take place online and over the phone, using banks worldwide to convert the trades. The term OTC shows that trades are not completed through a central clearing house or trading floor, but take place between two individuals or parties.
In the United States, any individual, known in the industry as a retail investor, can easily take part in online trading, in the global currency market, through a forex broker. The Commodity Futures Trading Commission, an independent Government agency, oversees all brokerage firms. The agency actively enforces its regulations, and prosecutes companies that engage in forex market fraud. Reputable forex brokers are also voluntary members of the National Futures Association (NFA). The NFA’s role is to safeguard the integrity of the markets, and protect investors.
Forex Trading – How It’s Done
The mechanism of online currency trading is quite straightforward. Trades always take place using a currency pair, buying one and selling the other simultaneously. The object is that the value of the currency bought will increase, and the value of the currency sold will drop. Most trades take place between seven pairs of the most liquid and strong world currencies.
When a retail investor signs up with a forex brokerage firm, they gain access to the broker’s online trading platform and tools. Knowing how to use the tools provided, and make the right pair choices for buying and selling, is vital to successful trading. A novice trader needs to learn the market, the strategies involved in trading, and current market trends. Because forex online currency trading takes place in real time, it involves quick decisions, and it is critical to learn the ropes before diving in to trades.