What Is Forex?
If you have seen ads for forex trading on TV, on the Internet or in magazines, you may be wondering “what is forex?” The word forex is short for foreign exchange, which is the exchange of one currency for another on the world’s money markets. It is sometimes shortened even further to FX.
Many people already have some experience in exchanging currencies. When you travel to another country for business or on vacation you need to change some of your money into the local currency. You probably realize as well that the banks are constantly changing money for businesses who import or export goods from foreign countries. However, it is estimated that 70%-90% of currency transactions are speculative in nature. This means that the person or institution making the exchange has no intention of taking delivery of the currency that they have ordered, but plans to trade it back at a profit. This is forex or currency trading.
Most world currencies no longer have a fixed exchange rate. This means that their values or prices are constantly fluctuating. When a country is experiencing an economic boom its currency value will generally be strong, or high. When a country has an economic crisis or downturn, its currency will usually fall too.
Since small changes in currency values are happening every minute of the day to every currency, there is a lot of potential for financial traders to make money by buying a currency whose price is rising in exchange for one whose price is falling. Unlike with stocks, you are always dealing with a pair of currencies because you have to give money in one currency to get it in another. Each currency is denoted by a three-letter abbreviation. Examples of the major pairs look like this: EUR/USD (euro/US dollar), GBP/JPY (British pound, Japanese yen).
Unlike stocks, you do not receive any dividends on a currency investment. You have to act on rising and falling trends or economic and financial news to decide when to buy and sell. You then close the trade by exchanging the opposite direction. If the market has moved far enough in the direction you expected, you will end up with a profit.
Until recent years the market was entirely in the hands of banks and other institutions with large investment funds available. But the development of the Internet has meant that much smaller investors can enter the markets via their home computer.
First, you need a broker. There are many who cater to the smaller trader by offering mini forex trading accounts. This enables you to start trading with just a few hundred dollars. However, a larger starting fund is recommended. Like all speculative trading, this is a risky form of investment so you should only be trading with money that you do not need for other purposes. Fortunately most brokers offer free forex demo accounts where you can learn your trading skills by practicing in demonstration mode before you ever risk a real cent.
You can use leverage to control larger sums of money than you have in your account. This means that theoretically you can make a lot of money in a short time. This is a very attractive prospect for a growing number of people. Keep in mind that money can be lost very fast too. Solid training, experience with a demo account and a good system are some of the qualities that you will need to cultivate if you want to explore what is forex trading for real.
