The US Dollar is the most traded currency in the world. It’s
estimated to be involved in around
90% of all currency trades.
Even though the Dollar is the dominant currency, London is
the dominant financial centre for
forex trading, with around 37% of the global market. New
York is a distant second, with around
17% of the market.
Forex is not a new business and its history is as old as the
history of money. But forex markets
have grown rapidly in recent years. In fact, trading volumes
have more than doubled since 2004.
The increase in popularity has been due to a number of
factors: the growing importance of
foreign exchange as an asset class, the increased trading
activity of high-frequency traders, and
the emergence of private investors as an important market
segment.
The main advantages of forex trading are:
• 24-hour trading, 6 days a week
• Zero commissions
• Enormous liquidity means tight dealing spreads
• Leveraged trading with low margin requirements
• The ability to profit in rising or falling markets
The forex market is the only financial market in the world
that is truly open 24 hours a day, 6
days a week. As one market goes to sleep, another one opens.
Trading starts in New Zealand
followed by Sydney, and moves around the world to Tokyo,
London and New York.
The sheer size of the forex markets keeps dealing costs very
low.
Forex trading is typically commission free. And the high
volumes of trading (called ‘liquidity’)
means dealing spreads (the difference between the buy and
sell price) are tiny. How tiny? In
forex markets, we’re talking as small as 1/100th of 1%.
Forex is also normally traded on ‘margin’, meaning you only
need to put down a fraction of your
actual trade size. Because of the huge liquidity of the
forex markets, the typical deposit or
‘margin requirement’ is only 1%. In other words, with a
deposit of £1,000 you can place a
£100,000 trade.
You can make a lot of money by spending a small amount of
money. Of course, leverage
magnifies both profits and losses. It amplifies your
results.
A key feature of forex trading is that it’s always done in
‘pairs’. Every forex trade consists of two
currencies.
You are effectively buying one currency and
simultaneously selling another - you
exchange one for the other. That’s why the rate at which
they are traded is called the exchange
rate.
The first currency in a pair is referred to as the “base currency”
and the second is called the
“quote currency”.
Most currency pairs are priced out to four places past the
decimal point.
