Why Forex Trading

The acronym for Foreign Exchange, Forex is the market place where the currencies of the world are traded. The market is anchored by governments, speculators, central banks, banking corporations, retail investors, and other financial institutions. It is estimated that nearly R4 trillion is traded daily in the global foreign exchange markets, making this several times larger than all of the US stock exchanges combined. The Forex market is also unique when compared to the other financial markets as it has no centralized or physical location. It is just a network of banks, financial institutions, hedge funds, corporations and retail traders buying and selling currencies with one another. Because of this unique characteristic, the Forex market is not bound by a single time zone. It operates on a 24 hours timeline from one time zone to another where all the major financial centers are located.

In earlier times, the only way a retail trader could have accessed the Forex market was through commercial banking institutions that deal with currency trading for investment and trading purposes. In 1971, when the major countries of the world floated their currencies, and as a result, trading in currencies increased tremendously. Many consider this the birth of the modern Forex market. Nowadays, apart from importers and exporters dealing with Forex, there is a wide spectrum of market participants. They include hedge funds, speculators, portfolio managers, and retail traders. Each individual group of market participants has their own objectives and reasons for dealing in Forex. They range from payment for goods and services to risk hedging, to pure speculation.

In general, to trade in Forex, a retail Forex trader would need to go through a market maker or a Forex broker. The trader will select the currency pair that they want to trade in based on their research and analysis. In the past it was normal for the Forex broker to just execute the trading orders and not to provide any recommendations. Nowadays, many brokers will offer trading tips, daily recommendations, and even researched analysis.

To make money in Forex trading, one can either take a long market position or go short. By going long, the trader is buying a currency pair and hoping to sell it later at a higher rate, thus profiting from the difference between what he paid for it and what he got from selling the currency pair. The opposite scenario is referred to as going short. In this situation, the trader will be selling a currency pair at the current market rate and hoping to buy it back later at a lower rate. This is one of the main attractions of the Forex market. Anyone can profit from the market, regardless if it is a bull or bear market. As long as it is possible to predict which direction the market is heading, a trader can position themselves to take advantage of market trends.