A Basic Introduction Into The Trillion Pound World Of Forex Trading

Simply put, Forex trading allows an investor to participate in profitable fluctuations of world currencies

. This process works by selecting pairs of currencies and then measuring profit or loss by the fluctuations of one currencys market activity versus the other.

The Forex trading market only emerged in 1978, seven years after the abandonment of the gold standard, when worldwide currencies were allowed to float according to supply and demand. Until 1995, Forex trading was only available to banks and large multinational corporations, but today, thanks to the proliferation of the computer and the internet, Forex trading is open to everyone, the results of which have seen the market growth be unprecedented, explosive and continuous in being unequalled by any other trading market.

Unlike traditional trading which brings buyers and sellers together in a central location, Forex trading is decentralized, as the market is a worldwide one where traders conduct business by high-speed internet connections with the Interbank Foreign currency exchange via Forex clearinghouses.

Forex is the most profitable trading marketplace in the world, primarily because it is the largest. The currency market as a whole accounts for over 1.2 trillion pounds of trading per day and to put this into perspective, the Forex market is 109 times greater than the London Stock Exchange where the average total daily value of both foreign and domestic stocks is a somewhat mere (by comparison at least) 10.7 billion pounds.

In addition to being the worlds largest and most profitable market, the foreign currency exchange market is the most powerful and persistent trading market regardless of negative economic indicators. This is because currencies trend better than every other market due to their macroeconomic nature. For instance, unlike many commodities whose supply and demand fundamentals can literally change overnight (such as the bursting of the property market bubble), currency fundamentals are much less random and far more predictable.

The predictability is well illustrated in the way that interest rates are changed gradually and only in small increments. Other examples of fundamental predictability are shown by the fact that we know what the most popular currencies are because the hierarchy has not changed. For instance, of the 1.2 trillion pound day trading in foreign currency exchange, 83 percent of spot activity and 95 percent of swap activity involves US Dollars. The Euro is the second most active currency at 37 percent, the Japanese Yen (24 percent) and the British Pound Sterling (10 percent) are ranked third and fourth respectively, with the Swiss Franc being at 7 percent and the Canadian and Australian Dollars accounting for 3 percent each.

Despite its high trading volume and its fundamental role in the world, the Forex market is rarely in the media limelight because its method of trading transaction is less visible than the trading floor of a stock exchange. Whilst this may be the case, trading on the foreign currency exchange market is today surging into the public awareness, as flocks of internet traders are attracted by the markets inherent profitability and risk manageability. Add to this the absence of geographic or temporal boundaries and the vibrantly active Forex market is open to all players.

by: Jeremy Watts

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