Introduction to FOREX Trading
Introduction to FOREX Trading
If you’re not sure just what the “FOREX” is, don’t worry, you’re
not alone. Most everyone has certainly heard of buying and
selling stocks and bonds, FOREX still remains a mystery for many.
The Foreign Exchange Market - better known as FOREX - is a world
wide market for buying and selling currencies. It handles a huge
volume of transactions 24 hours a day, 5 days a week. Daily
exchanges are worth approximately $1.5 trillion (US dollars). In
comparison, the United States Treasury Bond market averages $300
billion a day and American stock markets exchange about $100
billion a day.
The Foreign Exchange Market was established in 1971 with the
abolishment of fixed currency exchanges. That’s right, it buys
and sells money! Currencies became valued at ‘floating’ rates
determined by supply and demand. The FOREX grew steadily
throughout the 1970’s, but with the technological advances of
the 80’s FOREX grew from trading levels of $70 billion a day to
the current level of $1.5 trillion.
The FOREX is made up of about 5000 different trading
institutions such as international banks, central government
banks (such as the US Federal Reserve), and commercial companies
and brokers for all types of foreign currency exchange. FOREX is
traded everywhere - major trading centers are located in New
York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt,
and all trading is by telephone or over the Internet. Businesses
use the market to buy and sell products in other countries, but
most of the activity on the FOREX is from currency traders who
use it to generate profits from small movements in the market.
Even though there are many huge players in FOREX, it is
accessible to small investor’s as well. Previously, there were
high minimum transaction sizes and traders were required to meet
strict financial requirements. Now though, regulations have been
changed to allow large interbank units to be broken down into
smaller lots. Each lot is worth about $100,000 and is accessible
to the individual investor through ‘leverage’ - loans extended
for trading. Typically, lots can be controlled with a leverage
of 100:1 meaning that US$1,000 will allow you to control a
$100,000 currency exchange!
There are many advantages to trading in FOREX.
Liquidity - Because of the size of the Foreign Exchange
Market, investments are extremely liquid. International banks
are continuously providing bid and ask offers and the high
number of transactions each day means there is always a buyer or
a seller for any currency. There is always a bank open somewhere
in the world. Accessibility - The market is open 24 hours a
day, 5 days a week. The market opens Monday morning Australian
time and closes Friday afternoon New York time. Trades can be
done on the Internet from your home or office. Open Market -
Currency fluctuations are usually caused by changes in national
economies. News about these changes is accessible to everyone at
the same time - there can be no ‘insider trading’ in FOREX. No
one knows what will happen around the globe. People can make
educated guesses - that’s all. No commission - Brokers earn
money by setting a ’spread’ - the difference between what a
currency can be bought at and what it can be sold at.
How does it work?
Currencies are always traded in pairs - the US dollar against
the Japanese yen, or the English pound against the euro. Every
transaction involves selling one currency and buying another, so
if an investor believes the euro will gain against the dollar,
he will sell dollars and buy euros.
The potential for profit exists because there is always movement
between currencies. Even small changes can result in substantial
profits because of the large amount of money involved in each
transaction. At the same time, it can be a relatively safe
market for the individual investor. There are safeguards built
in to protect both the broker and the investor and a number of
software tools exist to minimize loss. Currency’s rarely “crash”
and thus risk is very limited.
