What is online forex trading?

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23 Jun 2017

We all know that each country has its own currency and the value of these currencies keep fluctuating in relation to the country's economy. Has it ever crossed your mind that you could benefit by buying or selling a foreign currency when its price rise or fall? That too from the comfort of your home with some luxurious tools that make it effortlessly convenient.


That is all the forex trading market is about, yes there is a foreign exchange market that allows you to gain from the movement of currency values. Here you buy the foreign currency that you think will do well in the near future in exchange for another currency. If the price of the currency moves in your favour you can sell it and gain a profit.


Let’s assume GBP (Great Britain Pound) is going to gain and you own some USD (United States Dollar), you can benefit from the gain of GBP by trading your USD for its worth of GBP.


How the forex marketplace came to be


It all started with the Bretton Woods system adopted in 1994 switching to the US dollar from the Gold Standard to determine the value of a currency. Gold Standard marked the emergence of modern international monetary system where each unit of a national currency was valuated to a specific amount of gold.


When US gold reserves depleted and were insufficient to back the currency in circulation in 1971, nations switched to a decentralized forex marketplace model. In this model, the value of a base currency was calculated by its relationship with the counter currency. From there forex market has come a long way now where close to $6 trillion exchange hands daily.


Technological advancements bring greater accessibility


Initially access to the foreign exchange market was limited to centralized national banks and large commercial banks. But the improved access to high speed internet in late 1990’s paved way for online forex trading where currencies can be traded from your personal computer.


This improved accessibility and convenience in placing trades is one of the factors that have contributed to the growth of forex trading.


How this $5.3 trillion worth online trading works


The forex market functions in a way similar to a stock market only it is multiple times bigger than all of the world’s stock markets put together. Forex trading happens to be the largest financial market on earth with an average daily trading volume of more than $5.3 trillion. New York Stock Exchange's average daily trading volume of $55 billion dwarfs before the forex market’s figures. An advantage of such a huge market with a large number of buyers and sellers is that transactions prices are low.


Another difference is that in forex trading you buy one currency and sell another at the same time. For instance, let us take EUR/USD the most traded currency pair in the forex market, the trading platform quotes an exchange rate. This exchange rate indicates how much one euro, the first currency in the pair known as base, is worth in US dollars, the second currency in the pair also known as counter currency.


A currency pair will always have two prices, a buying price and a selling price. The difference between the buying and selling price is the spread, which represents the brokerage service costs. Unlike stock brokers, Forex brokerages usually don't charge commissions as the spread replaces such transaction fees.


All you need to know about leverage


In forex trading the movement in prices are often in fractions of a penny. That is why the prices are quoted to the hundredths of cents. But if you are wondering how you can see significant returns on your forex trading with such prices, the answer is leverage. The forex market being the most liquid market many liquidity providers allow traders to trade with leverage.


Trading with leverage means to simply set aside a required margin depending on your trade size. If you choose a leverage of 300:1, you have to set aside $10 in your trading account to trade $3000 in the market. Leverage can magnify your profits, but be warned as it can also increase the losses.


Brokerages and trading software


The forex trading system comprises of brokerages who offer specialized platforms for forex traders to place their trades. These brokerages team up with liquidity providers who are linked to a prime broker giving access to the best exchange rates.


These brokerages enable their clients to trade in the forex market through specialized platforms. These trading platforms connect traders with brokers and offer traders a number of tools to enhance their opportunities. These tools range from real-time currency prices, opening and adjusting orders, technical and fundamental analysis, easy-to-understand, customisable charts and graphs showing currency pairs and indicators.


Of forex trading platforms MetaTrader 4 (MT4) and MetaTrader 5 (MT5) are the most widely used by traders and brokers alike for its user-friendly platform and handy specialized tools. However these trading platforms cannot be accessed through a website and instead have to be installed to your computer. But the good thing about it is these platforms are mobile friendly and can also be installed to your mobile to place trades and access currency prices on the go.


How you can trade in forex


If the lucrative forex market has appealed you as a prospective investment that can generate a good ROI, you can get started in a very simple and easy manner. All you have to do is download and install the trading platform. Once the software is installed you will be asked to provide personal details like address and name, fill up the details to complete the registration process. With trading platforms like the MT4 you can create and access multiple accounts. So it is important to record and safekeep a copy of your account login information. The platform also allows you to try a demo trading until you are confident of trading live.


That's it! You are all set to access the currency rates and buy and sell foreign currencies. Forex trading is open 24 hours and you can trade anytime, anywhere at your will.

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