Forex is acronym of Foreign Exchange. It is also referred to sometimes as “FOREX” or “Forex”, “Retail forex”, FX, “Spot FX” and “Spot”, but it is most commonly known as Forex or forex. Forex is, actually, an abbreviated version of the words Foreign Exchange and is the act of trading currencies from different countries against each other, put more basically, buying and selling currencies with the intention of making a profit from the difference.
Of course there is more to it than that and there are rules and methods to the practice.
Forex is a 24/7 market which is to say, the market never sleeps. It is operating somewhere in the world every minute and there is no opening or closing time, so the forex trader can start and finish his trades at any time. Forex trading has now reach the staggering volume of around 5 billion dollars a day. A few of the participants in this market are simply looking to exchange a foreign currency for their own, Examples are the multinational companies who need various currencies to conduct their business in different countries. But the vast majority of are there specifically to trade currencies and speculate on the movement of in the various exchange rates and take advantage if even the smallest fluctuation in exchange rates between currencies.
Forex is somewhat of a mystery to most people. It is unlike the traditional markets such as the stock market. Many forex traders operate from home, often late into the night and they can make fabulous amounts of money and, by the same token, lose vast amounts of money. Forex is in a constant trade around the world. The advent of the internet has changed the face of currency trading with the introduction of Interbank Foreign Currency Exchange via Forex Clearinghouses (also called Forex Brokerage Firms).
How Forex works is simple enough. All Forex transactions typically involve one party purchasing an amount of one currency in exchange for paying a quantity of another. The idea is to make a profit based upon the disparity or difference between the values of the currencies. This is based on the principle that money is an idea backed by confidence. The varying levels of confidence and the changes in this from day to day and even hour to hour or minute to minute are what the forex trader uses to gain lots of small incremental profits from trading (buying and selling) currency.
A trader can buy a currency when it is weaker, and sell it when it is stronger, against another currency of course. It should be kept in mind, that with every trader that makes a profit, another trader must make a loss. Forex trading is not a case of everybody wins. It still follows the rules that one is betting that a specific currency will rise against another currency and that a currency will not fall against another currency.
This potential for profit or loss is amplified by the effect of leverage. Leverage is a term that describes what can be achieved when a smaller amount of money controls a much larger amount of money. With regards to Forex Trading for example, a leverage-factor of 100 can allow the trader to hold a 100,000 US Dollar position with a modest 1,000 US Dollar margin deposit. Online Forex day trading focuses its investment activity largely on Spot Forex because of the ‘risk manageability’ of in-and-out trading plus the potential to generate excellent and highly liquid profits.
“Few financial industries generate as much excitement and profit as currency exchange. Traders around the world enter trades for weeks, days or split seconds, generating explosive moves or steady flows, and money changes hands quickly at a staggering daily average of a trillion US dollars. Forex profitability is legendary. George Soros of Quantum Fund realized a profit in excess of 1 billion dollars for a couple of days work in September 1992. Hans Hufschmid of Soloman Brothers, Inc. netted $28 million for 1993. Even by Wall Street standards, these numbers are heartstoppers”.*
* “Trading in the Global Currency Markets”, Cornelius Luca, 2000
The FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and many other institutions.
The average daily volume in the global forex and related markets is continuously growing. Turnover in April 2007, for example, was reported to be over three trillion dollars by the Bank for International Settlements and the market continues to grow with the volume increased by over 40 percent between 2007 and 2008 according to Euromoney’s annual FX Poll.
The forex market is somewhat unregulated and open to abuse. Due to its openness to virtually anyone who wishes to use it, it has been exposed to many scammers and people susceptible to fraud. For this reason it is prudent and important to make a very thorough study of E Forex and how it works fully before commencing E Forex.
In the forex market the differences between the bid and the offer is tiny, fractional almost and the reliance is on quantities of these bid/offers, occurring very fast to make money.
Useful to know is the fact that there is no insider information in the forex market. There is also theoretically no way any one participant can ‘corner’ the market, as it were. Exchange rate fluctuations are generally caused by monetary flows and changes in the economic conditions of the various countries. Any news that might affect the currency of any one or more countries is released simultaneously around the world so that everyone trading can receive the same news at the same time. Profit is made, not on predicting the trend of a currency against another but on the minute fluctuations occurring 24 hours a day, seven days a week.
One of the advantages of trading in the forex market is that there are no dealers to pay. One trades through a broker, also called a market maker, who sends the order to their partner in the Interbank Market where forex trades actually take place. This is called filling the position. When you decide to close your trade, again you pass this along to your broker and he closes your position on the Interbank Market and you are then credited with any gain or debited with any loss from that trade. This usually happens within seconds, and you can conduct hundreds of these trades within an hour or trading spell. In e-forex trading, one is using software to conduct ones trades for one. One sets the various parameters or rules, if you like, as to what you want to trade, how long, when to stop or start and other criteria and the software does the rest.
Currencies are traded against each other. This is done in pairs. The reason they are quoted in pairs is because in currency trading you are buying one currency and selling another and each currency must be shown in this transaction. Each pair of currencies is expressed as a ISO 4217 international three-letter code of the currency into which the price of one unit. AA common example would be EUR/USD. So this would be the price of one euro expressed in US dollars. Example. 1 euro = 1.4957 dollars.
There is a lot more to it of course, but this short outline gives you a grounding in the subject before you dip your toe into the water.
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