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A Brief Introduction to Forex
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Tuesday, March 24, 2009 GMT
Forex is the world’s largest and most liquid trading market. Many consider Forex to be the number one home-based business. Even though “regular” people have had the opportunity to take part in the Forex market (similar to the way banks and large corporations do) since 1998, it is just now becoming the cool, hip, new thing to talk about at parties, business events, and other social gatherings.
Although it has been somewhat of a loosely guarded secret, every day more and more investors are turning to the online world of Forex trading for income and profit, due to its numerous benefits & advantages over traditional trading vehicles such as stocks, bonds, and commodities.
But, still, whenever something is new or is just becoming a part of social consciousness, misconceptions and mistaken impressions are prevalent, the mind has to be open and the slate has to be clear to start out with accurate information.
So, this article will hopefully give you some solid, but basic, information on just what "FX" (Forex) means, what it is, and why it exists.
As a successful trader said, Trading Forex is like picking money up off the floor, and not trading Forex is like leaving it there for someone else to pick up." Others in the industry have also said, “Trading Forex is like having an ATM machine on your own computer”.
Here's an explanation of what Forex is and how a bunch of traders, profit from it.
The Foreign Exchange Market, also referred to as the "Forex" or "FX" market, is the spot (cash) market for currency.
But, don't mistake FX as trading the futures market, where you buy a contract to purchase a particular currency at a future price in time.
What FX traders do is much less risky than trading currencies on the futures market, much more profitable, and a lot easier than trading stocks.
So, you're probably wondering where this market us or how to access the FX market?
The answer is that FX Trading is not bound to any one trading floor and is not centralized on an exchange, as with the stock and futures markets. The FX market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Yes, if that's the first time you've heard about an all-electronic market, I know this may sound somewhat intriguing to you.
Here's what you are actually trading when you participate in the Foreign Exchange (Forex) market:
Essentially, like the large banks who use the FX market to protect themselves from the fluctuating exchange rate of different currencies, as an investor, what a FX trader is doing is simultaneously exchanging one countries currency for another. So, in actuality, they're electronically trading a currency-pair and the price that is quoted to us is the exchange rate between the two currencies.
In other words, the quoted price is how many of the one currency is worth 1 of the other currency.
Example:
EUR/USD last trade 1.2850 - One Euro is worth $1.2850 US dollars. The first currency (in this example, the EURO) is referred to as the base currency and the second (/USD) as the counter or quote currency.
The Forex has a daily trading volume of around $1.5 trillion dollars - 30 times larger than the combined volume of all U.S. equity markets. This means that 1,498,574 skilled traders could each take 1 million dollars out of the Forex market every day and the Forex would still have more money left than the New York Stock exchange every day!
The Forex plays a vital role in the world economy and there will always be a tremendous need for Forex. International trade increases as technology and communication increases. As long as there is international trade, there will be a Forex market. The FX market has to exist so a country like Japan can sell products in the United States and be able to receive Japanese Yen in exchange for US Dollar.
There's plenty of money to be made using Forex for plenty of traders that use the right trading techniques / tactics that will allow them to profit immensely. And, with only 5% of the daily turnover of volume coming from banks, government and large corporations who need to hedge, the other 95% are for speculation and profit.
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