Foreign currency trading: the basics of forex trading

Foreign currency trading - more commonly referred to as forex - is the process of trading the currency of nations through stock brokers. Forex is highly dependent on the movement of currency.

The process of forex trading: how it works

Forex trading is always done in currency pairs. Most trading occurs against the US dollar (USD). A typical example of a currency pairing would be the Swiss Franc (CHF) and the USD or CHF/USD. In this equation the USD would normally be followed by a value price, e.g. 1.1800. This notifies the buyer of the Swiss Franc that 1.1800 USD is needed to purchase 1 Swiss Franc. The currency being traded against always appears second in the exchange rate equation.

The major six currencies that are traded globally are the USD, the EURO (EUR), British Pound Sterling (GBP), the CHF, Japanese Yen (JPY) and the Australian dollar (AUD).

Advantages of Forex trading

• Currency is a fluid market, meaning that most currencies are up for trade
• Currencies can be leveraged, so the investor may be able to get substantial dollar investment for a reduced price
• It is highly unlikely that governments would not be able to pay; this reduces the risk of financial loss

Disadvantages of forex trading

• Currency trading is virtually lawless in comparison to the regulation required when trading regular stocks. There is a laissez faire approach when in comes to forex trading, there is no government regulation and no arbitration; it is a good faith exchange. To enquire about the complaints process in regards to currency trading contact the Australian Securities and Investments Commission.