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Published on June 24th, 2014 | by Pete

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Forex Trading—What’s it all About?

There has been much news of late regarding the popularity of Forex trading. While the history of currency trading goes back to the late 1800’s and can be traced to the creation of the gold standard monetary system, the recent allure of Forex trading stems mostly for the inconsistencies in most equity markets and the lackluster returns provided by them.

The Forex market differs from the equity market in that the latter involves trading with individual of institutional investors whereas Forex is traded mostly by large influential participants such as central banks and federal governments.

Banks and the Interbank

In many countries, the central bank is an extension of the government and conducts policy concurrently with it. However, the majority of Forex transactions are conducted by foremost financial institutions. Individuals needing to change foreign currency for small-scale transactions can do so through neighborhood banks or via the Internet where financial interactions can take place between banks with the simple click on a tab.

But it is through the interbank market that large banks transact with each other and determine the currency price that individual traders see on their trading platforms. Banks on the interbank market connect with each other on electronic brokering systems and this is where the majority of Forex trades are executed.

Banks make money on the Forex market by exchanging currency at a premium to the price they paid to obtain it. Since the Forex market is a decentralized market, it is not uncommon to see different banks with slightly different exchange rates for the same currency.

Not So Simple

On first glance, trading Forex may seem simple enough and many Forex brokers would have you believe that it is just a matter of deciding whether a currency pair will go up or down in order to experience profits on Forex markets. In actual fact, it is far more complicated than many Forex traders think and caution is usually advised before a first trade is placed. Investors who have moved over from equity trading to Forex trading may feel a certain amount of confidence in their judgment and jump right into the Forex markets based on their prior successes. However, this can lead to substantial losses on their part.

Indeed, Forex training is definitely a prudent undertaking by all traders if any money is to be made in currency trading. Understanding the technical and fundamental reasons behind currency pairs and how they effect price movements is an essential ingredient to profitable Forex trading and the more knowledge of and familiarity with Forex indicators and tools, the more success a trader can expect.

In addition to the educational tutorials provided by Forex brokers to their account holders, there are several independent online courses which offer a full range of material for beginners as well as advanced traders. It is certainly advisable for anyone considering Forex trading to select an introductory course that best meets his/her individual needs before opening an account with a Forex broker.

Cina Coren is a contributing writer at dailyforex.com and a freelance blogger for several financial sites.

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