Foreign Exchange Trading: an overview

It is estimated that the Foreign exchange trading market has a daily turnover of approximately $1,000 billion to $1,500 trillion. It should come as no surprise then that the FOREX market or currency market as it is sometimes called is the largest market in the world. Foreign exchange trading is a profitable business, which explains why it is a popular choice with big fish and novices worldwide.

The main contributors to the foreign exchange market include commercial and central banks, investment funds, firms, exchange markets, broker companies and individual foreign exchange traders. Interbank transactions typically have the most influence on market trends as banks trade billions of dollars a day. Interbank traders include the Bank of America, Union Bank of Switzerland, Deutsche Bank, Barclays Bank and Citibank to name but a few.

There are currently over 20 major world currency exchange markets. The London Stock Exchange is the most lucrative of all these because it is positioned between the two time zones of Asia and America and can therefore take advantage of both American and Asian markets. Other leading markets include:

• American Stock Exchange (AMEX)

• Singapore Exchange (SES)

• New York Stock Exchange (NYSE)

• Tokyo Stock Exchange (TSE)

• Stock Exchange of Thailand (SET)

• Toronto Stock Exchange (TSE)

• La Bourse de Paris (SBF)

The main attraction of the FOREX market from a trader's point of view is its extensive liquidity. Other advantages to foreign exchange trading include the fact that there is no formal exchange for currency transactions and free competition is permitted. This makes trading on the FOREX market far simpler and less restricted than trading on any other market. Positions can be kept open for years or closed within seconds depending on trading tactics.

FOREX traders make a profit by analyzing foreign exchange markets and speculating on currency fluctuations. The most common type of trading used in exchange trading is marginal trading. Put simply, marginal trading is trading with money that you do not physically have.

Speculative FOREX traders open positions in the exchange market using only a small portion of the actual sum that they are trading. This is done through brokers who take a minimum deposit and then grant traders a leverage of say 1:100. That means that as a trader if you wish to open a position at a value of $200,000, you would invest a $2000 deposit with a broker who would then give you $198,000 credit to trade with. Opening small accounts in US dollars enables FOREX traders to quickly buy and sell currencies from all over the world, thereby making large profits off the fluctuations in exchange rates between various currencies. For this reason, returns on foreign exchange trading are often higher than returns on other forms of trading such as commodity trading.

The most commonly traded currencies include the Japanese yen (JPY), the euro (EUR), the British pound (GPP), the New Zealand dollar (NZD) and the Swiss franc (CHF). All these currencies are traded against the US dollar (USD). The general consensus is that the most liquid currency pair is the EURUSD, while the USDCHF is seen as the most volatile currency pair. New traders are advised to stick to the EURUSD pair and the GBPUSD pair.