The foreign exchange market (Forex) is where international currencies are traded with one another. Forex is the world’s largest financial market. Every day trillions of dollars are exchanged for both trade and speculation. It is not a physical market in the sense of New York Stock Exchange, but rather an over-the-counter market where currencies are traded using computers. This article is designed to help you learn about forex.
Participants In The Forex Market
There are a number of different participants involved with Forex trading. There are businesses who do business in different countries. For example, a car manufactures in the Japan might export their vehicles to United States. When the Japanese car manufacturer receives pavement in United States dollars they will need to bring it back to Japan. So they will need to go to the foreign exchange market to exchange their USD for JPY. Another common reason that forex is traded is because of speculation. These are traders who aim to earn profits by correctly predicting the movement of currency pairs. These traders range from large hedge funds to part-time traders working from their own home.
What Is Spread Betting And How Does It Relate To Forex Trading?
There are a number of different ways that people can trade the foreign exchange market. In the past one the most common ways was using forex futures. But, because of complexity and barriers to entry of trading forex futures many smaller traders are attracted to alternatives such as spread betting.
Spread betting allows you to place bets on derivatives of currency pair. An example of a currency peer would be the USD/GBP. When you place a spread bet you are not actually purchasing the currency pair itself, but rather placing a bet on the predicted movement of the currency pair.
Spread betting takes name from the fact that there is a difference between that the price that you can buy and the price that you can sell. This is called the spread and it is how the spread betting company makes its money.
The Advantages Of Using Spread Betting To Trade Forex
Using spread betting to trade forex has a number of advantages. These advantages include –
Low initial capital – One of the reasons that at home traders are attracted to spread betting is because of the low initial capital requirements. You can begin spread betting with as little as a few hundred dollars. You can then use leverage to gain exposure to much bigger positions. For example, if your spread betting firm requires a 2% deposit and you put up £500 this would give you the equivalent of the ability to have market exposure of £25,000. This increases your potential to make larger returns on your initial capital.
Risk management tools available – When you leverage your trades you also increase your risk. This is why it is important to protect your position using risk management tools. Spread trading offers two different types of tools you can use in order to prevent losses. These include the standard stop loss order and the guaranteed stop loss order. These allow you to set the price at which you will close out your trade and so your potential losses can be established as you enter the trade.
Access to many different currencies pairs – Another reason that at home traders use spread betting is because it gives them access to many different currency pairs using this same spread betting account. This means that they do not need to open up multiple accounts at different forex brokers.
Spread betting has opened up the Forex market to a much wider group of traders. Because of the ability to leverage and trade a wide range of currencies using spread betting, Forex is becoming increasingly appealing to at home traders. Forex is not without its risk and and it can take months if not years before a trader becomes profitable. But, there is the potential to make significant returns –and indeed losses– even starting with limited amounts of capital.