There are many unique aspects to forex trading that currency traders around the world use to leverage risk within an investment portfolio, facilitate international business, generate income and speculate on the movement of currency values. The following discussion will highlight some of those aspects and demonstrate how currency traders use them to their advantage.
What Is Forex?
To understand the unique, sometimes complicated, nature of currency trading, it is important to know what the foreign exchange market entails. Global currency values are constantly in a state of fluctuating valuation. That combined with high liquidity provides a market environment that is highly volatile and allows for banks, investment firms and individual traders to use those market conditions to their benefit. Currencies can be traded on the foreign exchange market twenty four hours a day, every day except for weekends. Additionally, foreign exchange derivatives such as futures and options can be traded through Forex.
Who Trades Forex?
Upon the birth of the foreign exchange market in the 1970′s, the primary traders where large, private and central banks. Throughout the years, the availability for trading currencies in the global market place has expanded to include other financial institutions such as hedge funds and corporate investment firms. As technology has advanced, the individual trader has been able to trade the currency market through the use of a Forex trading platform. By opening and funding a Forex account with a brokerage firm or bank, the individual retail investor is able to execute trades at his or her discretion and convenience.
The highly liquid, volatile nature of currency trading is appealing to many traders because trade execution can be made very quickly and can result in large profits. However, trading global currencies can be extremely risky as a loss in capital can occur very rapidly. Novice traders and those that are risk averse should avoid trading Forex. Despite the risks associated with such trading, many find the foreign exchange markets for trading currencies desirable over other types of investment vehicles such as stocks, bonds, and commodities.