If you are just starting out in the forex markets or want to broaden your horizons and look at other potential trading opportunities, it is important that you have a basic understanding of how these markets work.

Forex trading may potentially seem daunting and challenging but with the help of a forex broker who provides you with the right tools and trading platform to invest with as much ease as possible, you can soon be up and running.

Forex trading simplified

Foreign exchange markets, which are more commonly referred to as Forex or FX, is in a nutshell, the exchange of one currency for another at an agreed exchange price via the over-the-counter (OTC) market.

Forex is by some margin, the most traded market on the planet and the average annual turnover normally exceeds $4 trillion each day the markets are open for business.

When you are forex trading, what you are doing is speculating by buying one currency whilst selling another. As currency values rise and fall based on a number of influential factors such as economic situations and conditions as well as geopolitics, this gives the trader the opportunity to profit by correctly guessing which way the currency price is heading and betting accordingly.

One of the fundamental differences between the OTC forex markets and stock exchanges around the globe, is that forex has no physical location or central exchange. This means that trading can place 24 hours a day through a global network that never sleeps and therefore provides traders with plenty of chances to trade frequently and in large volumes if they wish to.

24-hour trading

There is little doubt that the popularity of forex has a lot to do with the fact that there are prospects for trading around the clock.

This means that you can start in New Zealand on Monday morning and move on to Asian markets such as Tokyo and Singapore whilst taking in New York and London. This 24 hour availability helps to ensure that price gapping is kept to a minimum and allows traders to take a position almost whenever they want to, although there will inevitably be quiet points where volumes might dip and the market spread becomes momentarily wider.

Leveraged product

FX is a leveraged product. This means that you will often only be required to deposit a relatively small percentage of the total value of your position in order to successfully place a trade.

The huge advantage that this offers compared to buying and selling stocks and shares on the stock market for example, is that there is the potential to generate a profit or loss, from an initial capital outlay that is lower than if you were buying stocks.

Pairs

Currencies are quoted in pairs and is a price comparison between one currency versus another.

Each of these currencies has a base currency and a counter currency, with the base quoted on the left of the pair and the counter on the right. Price movements are triggered by perceived weakening or strengthening of a particular currency, so if the price of EUR/USD was to fall, this would be a signal that the markets consider that the US Dollar was appreciating in value whilst the Euro was depreciating.

Exploring currency ETFs

Many traders would probably agree that Exchange-Traded Funds (ETFs) have had the positive effect of opening up access to what were once previously relatively inaccessible corners of markets such as foreign equities, commodities and alternative asset classes.

Currency ETF’s have been particularly popular, with an ever-growing interest amongst both traders and investors, who like the way that ETF’s help to simplify the challenges and barriers that can sometimes exist when trying to enter the forex market.

Currency ETF’s work by trying to replicate the movements of a particular currency against either the USD or a basket of currencies. The way that this is achieved is by using cash deposits or through the use of futures and swaps in order to gain the desired exposure.

If you are of the opinion that a specific currency such as the EURO for example, is either rise or fall compared to the USD price, currency ETF’s provide you with the opportunity and mechanics to capitalise on your opinion.

When you purchase an ETF you are betting on the price of a currency moving in a certain direction and are able to potentially make money in this way without actually having to open a separate forex trading account.

Two types

There are two main types of currency ETF products that you can use, and these either reflect a specific currency versus the USD or they reflect a basket of currencies against the USD.

Once you gain a working knowledge of the list of currency-specific exchange-traded products and understand the differing risks and opportunity levels that exist with ETF’s, you can certainly consider adding this method of trading to your overall strategy.

Lydia Cameron likes Forex trading, especially EFT trading. When she finds something she really enjoys, she likes to share that with her readership. You can read her helpful article on many trading and investing sites today.