Forex trading, also known as FX trading, refers to foreign exchange trading or converting currencies in the global marketplace. The currencies are traded against one another, and the currency combinations are described using two exchange rates used for converting one to the other.
The foreign exchange markets operate as cash markets and offer futures, options and forwards as well as the option to simply swap currencies. Traders use the foreign exchange markets to speculate on the outcome of geopolitical activity, to lower the costs of doing business internationally and to maintain a diverse portfolio.
There is no centralised organisation that controls the trade in foreign currencies – all trades are conducted electronically through global computer networks. Because of the difference in time zones, the market is active 24 hours a day for five and a half days of the week.
With markets opening and closing at different times in different financial centres all over the world, demand for various currencies can change at any time. The internet has allowed individuals access to the foreign currency markets, with many trading through banks directly as well as through brokers.
The benefits of foreign exchange trading
The value of the trades made on the foreign exchange market is 5.1 trillion dollars per day, compared to just 212 billion dollars on the stock exchange. The foreign exchange market is the most liquid in the world, meaning that there are millions of transactions taking place every day which keeps the cost of transacting low and enables individuals to generate profit from even the slightest movement in the market.
The major currencies involved in the foreign exchange market are:
- US Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
- Australian Dollar (AUD)
- Canadian Dollar (CAD)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
Demand for currencies is affected by a wide array of factors, including political changes, and these currencies represent 75% of all trading on the foreign exchange market.
interest rates and other financial activity. The 24-hour nature of the market means that forex traders can react quickly to news, especially compared to the stock exchange which often lags behind due to its trading hours.
This does mean that traders need to pay attention to the news and current affairs so they can make better predictions about fluctuations in the value of various currencies. It’s important to have a feel for the way the investment market responds to global events in order to succeed in foreign currency trading.
The foreign exchange market is in constant flux, with anything from adverse weather conditions to changes in legislation changing the exchange rates between currencies. Anyone with an interest in world affairs and the forex market will soon notice the way the numbers fluctuate in response to news events.
Timing can be the key to success with forex trading
For anyone starting out in forex trading, it is also important to get used to the activity levels of the international markets. For example, one of the most active currency pairs is the British Pound against the US Dollar, and this is most active when both markets are open, which is between 12 and 4 pm each day.
The US session is the final one of the trading days, so there tends to be quite a lot of activity as traders try to make the most of the final moments of the trading day. Some traders will be relying on updates from other markets to maximise their investments, so it can be profitable to trade at different times of the day and night, especially when the major markets’ opening hours overlap.
Because the Pound and the Euro markets are open at mostly the same time, with a significant crossover with the US market, they are often favoured by UK traders looking to capitalise on the opportunity to trade at various points throughout the day without having to wait for another market to open.
Trading through a bank or investment firm based in the United States can maximise profits by allowing traders to capitalise on the profits available trading the US dollar. Because the US and Europe have similar interests, UK investors can increase the time available for them to trade and make the most of their access to US news to identify potential trading opportunities.
Can you generate a passive income through forex trading?
It is also possible to generate a passive income through forex trading, which many investors make the most of. A trader with knowledge of the markets can automate their trades to take place at pre-set levels based on their analysis of the markets.
By using past currency performance to predict future trends, traders can assess likely trends in currency rates and trade based on their predictions. By using a platform that allows you to set triggers for buying and selling, it is possible to effectively automate your market analysis and trades without having to actually make any trades themselves.
This is a strategy that experienced traders can use to maximise their income and, once the software is programmed to follow a specific strategy, it requires only a minimal time investment. In liquid markets, such as the foreign exchange market, the sheer volume of trades taking place every day means there are constant, tiny incremental changes that can be leveraged into a passive income.
Experienced traders can also generate a passive income by creating a social media presence and using their knowledge to open up another income stream. This can be used to generate an additional passive income by approaching sponsors to buy advertising space on their channel.
Traders with good reputations can also partner with a broker and earn an income from referring clients. This can be a percentage of the commission, a fixed sum for every trade or a percentage of their income, depending on the quality of the leads and the income generated.
Diversifying is often the key to surviving major changes in the trading markets, and foreign exchange trading can be a great accompaniment to an established portfolio. It’s also an interesting income stream to cultivate for anyone who wants to leverage their knowledge of international markets to maximise their profits.