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Understanding the Forex Market: Risks and Rewards

By: Markus Heitkoetter

The word “forex” comes from Foreign Exchange, and is often ab¬breviated to FX. Trading the forex market involves the buying and selling of currencies. In simpler terms, it’s the exchange of one currency for another at an agreed upon rate.

All the currency of the world is involved in the forex market. It may be confusing to choose which one to trade, but all you really need to know are the major currencies, which are the most frequently traded.

It’s also important to know that forex is traded in currency pairs. Trading currency pairs means you’re buying one currency while simulta¬neously selling another currency.

The most heavily traded products in the forex market are typically:

• EUR/USD
• USD/JPY
• GBP/USD

The forex market is one of the most liquid markets available to trade. It also has decent volatility, and you really don’t need that much money to get involved in forex trading, thanks to the high leverage. Many forex brokers will let you get started with as little as $1,000 in your trading account.

However, one thing that every trader considering the forex market should know is that it’s extremely volatile. You can easily make (or lose) thousands of dollars in a single day.

It’s also an unregulated market. Many forex brokers offer “free quotes and charts” and “no commissions,” but keep in mind that nothing is for free.

It's like at the exchange booths when you’re on vacation: you might ex¬change $100 into 80 Euro, but when you change the 80 Euro back into dollars, you only receive $96. The same concept applies when trading forex: you’re paying at least 2 “pips.” This amounts to approximately $20, depending on the currency pair you're trading.

Another disadvantage of forex trading is that you’re NOT trading at an exchange: there is no "Foreign Exchange."

You’re trading against your broker: if you’re selling, then your broker is buying from you, and vice versa. And that's why your broker is giving you the quotes for free: he can basically give you ANY quote he chooses, since, as stated before, there are no market regulations.

There are definitely positives and negatives when it comes to trading forex, but regardless of what you decide, keep in mind that the forex markets can be tricky – they shouldn’t be traded lightly.

Article Source: http://www.articlebankonline.com

Markus Heitkoetter is a professional day trading coach and author of “The Complete Guide to Day Trading.” In this book, he lays out a simple, proven system for trading success. He covers it all, from the basic essentials to the actual process of making money in the markets. Visit www.thecompleteguidetodaytrading.com to learn more.

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