The foreign exchange market is easily the largest marketplace on the planet. Often shortened to Forex, the foreign exchange market was once reserved to the ultra-rich, corporations, governments and banks. This is because placing a trade once required very large deposit amounts, so it excluded many smaller traders.
These days, the advent of the internet and the use of leverage can allow smaller investors to place trades and take advantage of the massive foreign exchange market. Unlike stocks, there is no centralized exchange for the Forex market. All the trades and transactions happen electronically or over the phone.
With foreign exchange trading for profit, all currencies are traded in pairs. This means you sell your base currency in exchange for buying another currency. When you close out your trade, you sell the second currency to buy back your base currency. In order to make a profit from these trades, the object is to buy the second currency low and then place your closing trade to get your original currency back when the price changes sufficiently to represent a profit.
More than 85% of all Forex trades happen within the seven major currency pairs. These are known as the Majors and they include the US Dollar, the Euro, the Japanese Yen, the British Pound, the Swiss Franc, the Canadian Dollar and the Australian Dollar. Smaller currencies or emerging currencies are also traded, but these are known to be significantly more volatile as compared to the Majors.
Foreign currency pricing is shown in pips, or 'percentage in point'. These are usually displayed down to the fourth decimal place for most currencies, with the exception of the Japanese Yen, which is only shown to two decimal places. If you're reading a foreign exchange quote, you'll see two numbers shown. The first number is the base currency.
Most trading quotes are shown as a spread, which represents the bid price and the ask price. The bid price is the price at which you can sell the base foreign exchange currency and the ask price is the price at which you can buy the base currency. Understanding how to read these pricing notations is vitally important to the success of any Forex trader.
Perhaps the biggest benefit with foreign exchange trading is the ability to trade at any time of the night or day. Unlike the stock market, where trades are executed only during trading hours, the Forex market operates on a global scale. This means trading begins in Sydney, Australia and moves around the globe at time zones reach the opening of the trading day in respective countries. From Sydney, trading then opens in Tokyo, Japan before London, England trading opens and then New York.
This allows Forex traders to place trades at any time of the day or night, giving them the ability to respond to any currency pricing fluctuations quickly without the need to wait until the next trading session opens. The biggest draw-card to trading on the foreign exchange market is the speed at which trades can be executed. This allows traders to realize significant profits on the foreign exchange at any time of the day or night, which means they have the opportunity to develop a viable business they can work in whatever hours suit them.