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Why Trade Forex? | US Dollar and UK Pound

BY: sana rrantis | Category: Finance | Submitted: 2013-12-09 07:03:15
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Article Summary: "On a daily basis, a large sum of money is traded in spot forex trading according to the Bank for International Settlement and this is the biggest financial market today. The trading equities of the US and UK when combined cannot match the amount of money traded here..."

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Day by day, tons of money are traded off in what is known as spot forex trading which according to the Bank for International Settlement is the biggest financial market that we have. You can combine the equities of the US and UK and still come up short when it comes to the trading equity in this market. For the past decade, there has been a doubling of the trading equities that are involved in the forex market and this is something that caught the attention of fund managers. In such a market, currency pairs are essential. Normally, when one currency appreciates, there is one which depreciates. So if a trader thinks that sterling will appreciate in value against the euro, they can buy the GBP EUR pair in the forex market or sell the pair if they're betting the euro is likely to strengthen against the pound. There is an absence of an exchange in this case. Instead, forex trading is conducted on an over the counter or OTC basis. Buyers and sellers agree a price and contract with one another directly, or through brokers and market makers.

In order to accomplish a transaction in spot forex trading, you need around two days but this is efficient not to mention a very direct form of trading. These banks trade on behalf of clients, for either transaction related or purely speculative purposes, and for their own book, and their size means they effectively act as the ultimate market makers, setting the bid and ask prices, which form the basis of pricing across the world. What is absent here is a centralized exchange allowing for varying rates to exist from market to market and broker to broker.

Here is where the bid and ask prices matter tremendously and the narrowest spreads are only available to the few organizations who are financially able to participate in the interbank market. Thanks to the growing volumes of retail trade, pooling transactions is a common activity that brokers resort to allowing them to trade with better prices. Retail spot forex spreads are now as low as just two 'pips'. If you are a buyer, you will know how much a particular type of currency is and the quote also tells you their selling price.

When it comes to the forex market, this is a huge and profitable trading avenue where liquidity is never absent. Traders can decide to join or get out of the market with ease. But unless you're a professional speculator who pays income tax on trading profits, profits from forex trading will be subject to capital gains tax, although this isn't the case if you get exposure to the market via spread bets.

There is never a time when the prices of foreign exchange remained still even for a single day. When it comes to a market like this one, a predicted increase in a currency's value may mean the depreciation of its pair. Only one percent more or less is the amount of change that can take place between currency pairs. So, with such small movements, why would traders be interested in playing the FX markets?

Here is where leverage is important. Earning a profit is always possible here even if you trade small and this is because of modern trading platforms and techniques. Here, transactions happen on a daily basis and the need for control is satisfied for both brokers and traders.

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