Foreign Exchange (Forex) Trading , otherwise known as the currency market, is the trading of different currencies against each other. The Forex market was established in 1971 when the fixed currency exchange system was abolished and replaced by floating currency standards. With the latter, currency values change depending on its reaction to socioeconomic and political factors. At times, changes due due to speculations on trade and market forces.
The increase in importation by a country like the United States for goods and services from say, Canada, can lead to more demand for Canadian dollars. Or an increase in the demand for equipment from Japan to Australia, can lead to more demand for Japanese yen.
The basic idea surrounding Forex trading, is the buying and selling of treaties simultaneously, between countries. Since world treaties move on a fluctuating level, the interplay of trade between countries, would determine the value that each currency would have against each other.
The advantages of Foreign Exchange Trading as compared to other forms of investments are as follow:
- Non risk liquid investment – trading in currencies would not have problems in currency conversion since currencies are the most liquid form of investment.
- Accessibility of trading time – trading is open for 24 hours, 5 days a week. It opens Monday morning, in Australia and closes in the afternoon, in New York.
- No insider trading – it is an open market where changes in values are determined by market forces and not by a knowledgeable few.
- No commissions – where brokers earned by setting a spread instead of a fixed percentage or commission.
Choosing a broker is of paramount importance since he would be the professional who would know of the vast array of contracts that are available for trading. His choices should be varied and not only include currencies from developing countries — but also that of the more volatile emerging economies as well.
What are the 6 most important points to consider when choosing a Broker?
- Security of investment – there should be assurance that the broker is trustworthy — where funds are safe and monies not squandered nor pilfered. He must have experience and a solid track record in the business. Membership in industry organizations like the NFA and CGTC in the United States can be a gauge of its professionalism.
- The transaction cost of trading – brokers should be reasonable in its indicated spread. Most brokers would opt to widen the bid ask spread as against quote values as this would likely increase his earnings. You should see to it that the spread is reasonable and within industry standards.
- Ease of deposit and withdrawal – as custodian of your funds, the broker should not hold withdrawals of monies, representinging or in any case, termination of contract. Deposit of funds should be easy, fast and uncomplicated.
- Trading Platform – which is simply the use of automation in online trading. This ensures that data on trades and currency prices can not be tampered with by anyone. To be effective, the trading platform should be able to generate relevant graphical and statistical charts that are easy to read and understand.
- Execution of order – brokers should be able to fill your buy or sell orders within microsecond of placing it. The speed with which the quotes are placed, would decide on how serious he is in keeping your business.
- Customer assistance and service – friendly, efficient and helpful staff can lessen the tension in trading. A congenial staff is a measure of competency not only of the broker but that of the company as well.