An overview of the Forex market
market is a non-stop cash market where currencies of nations are
traded, typically via brokers. Foreign currencies are constantly and
simultaneously bought and sold across local and global markets and
traders' investments increase or decrease in value based upon
currency movements. Foreign exchange market conditions can change at
any time in response to real-time events.
The main enticements of currency dealing to private investors and
attractions for short-term Forex trading are:
- 24-hour trading, 5 days a week with non-stop access to global Forex
- An enormous liquid market making it easy to trade most currencies.
- Volatile markets offering profit opportunities.
- Standard instruments for controlling risk exposure.
- The ability to profit in rising or falling markets.
- Leveraged trading with low margin requirements.
- Many options for zero commission trading.
Forex tradingThe investor's goal in Forex trading
is to profit from foreign currency movements. Forex trading or currency
trading is always done in currency pairs. For example, the exchange rate
of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to
as a "Forex rate" or just "rate" for short. If the investor had bought
1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year
later, the Forex rate was 1.2083, which means that the value of the euro
(the numerator of the EUR/USD ratio) increased in relation to the U.S.
dollar. The investor could now sell the 1000 euros in order to receive
1208.30 dollars. Therefore, the investor would have USD 122.60 more than
what he had started one year earlier. However, to know if the investor
made a good investment, one needs to compare this investment option to
alternative investments. At the very minimum, the return on investment
(ROI) should be compared to the return on a "risk-free" investment. One
example of a risk-free investment is long-term U.S. government bonds since
there is practically no chance for a default, i.e. the U.S. government
going bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, trade only when you expect the currency you
are buying to increase in value relative to the currency you are selling.
If the currency you are buying does increase in value, you must sell back
the other currency in order to lock in a profit. An open trade (also
called an open position) is a trade in which a trader has bought or sold a
particular currency pair and has not yet sold or bought back the
equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is
speculative. In other words, the person or institution that bought or sold
the currency has no plan to actually take delivery of the currency in the
end; rather, they were solely speculating on the movement of that