The Foreign Exchange is also knows as currency trading, Forex, or simply FX. In Forex trading every currency worldwide is traded in a global market. With an average trading volume of $5 trillion per day, it is the most liquid and largest market. All stock markets combined don’t even come close to this number.
With such high volume of trading, you may find some great oportunities for yourself in the forex market.
A single USD on any given day could get you 1.1 CAD. The very next day this USD could get you 1.15 CAD. Small changes such can these might not seem like they’d make a difference, but when put on a large scale, the significance becomes apparent.
Lets use an example of a company who pays employees overseas. Imagine what currency exchange rate could do to the company’s bottom line. Lets say for example, they are exchanging one currency for another that is at a higher value. It would be beneficial for the company to make their trade on a day when the exchange rate is lower. If the company needed to exchange USD to CAD, using the example above, it would greatly benefit the company to make their exchange on the day where CAD is 1.1 rather than 1.15. Pennies will add up quick when on a large scale.
Like being a business owner or traveler, when trading forex, you will want to make trades with the knowledge of when exchange rates will change to receive a more favorable rate.
Foreign transactions in the market are similar to what you may have done if you’ve traveled abroad. A trip north across the border and you are converting USD into CAD. The exchange rate between the two currencies is based on supply and demand. This is what determines how many CAD you get for you USD and the rate of this exchange is constantly fluctuating.
OPPORTUNITIES IN FOREX: WHAT’S YOUR OPINION?
Like stocks, currencies are traded based on what is their assumed value and what direction that value is headed.
The big difference in forex vs stocks is that trading up is done as easily as trading down. Because the market is so large it is easy to find a buyer or seller for the currency you have your eye on. Based on what foreign news you hear, you can decide the value of certain currency and then buy or sell as you see fit.
If you hear news that will cause the CAD to lose value then you would sell your CAD against another currency. The more the CAD depreciates agains the currency you sell it against, the more profit you make. If the CAD begins to regain value then you begin to lose profit and should quickly get out of the trade.
Read more about how to buy and sell currency as well as information on trading on margin in Everything Forex Trading Part II…