What Is Forex

October 28, 2009

The Market

The currency trading (foreign exchange, Forex, FX) market is the biggest and fastest growing market on earth. Its daily turnover is more than 2.5 trillion dollars. The particpants in this market are central and commercial banks, corporations, institutional investors, hedge funds, and private individuals like you.

What happens in the market?

Markets are places where goods are traded, and the same goes with Forex. In Forex markets, the “goods” are the currencies of various countries (as well as gold and silver). For example, you might buy euro with US dollars, or you might sell Japanese Yen for Canadian dollars. It’s as basic as trading one currency for another.

Of course, you don’t have to purchase or sell actual, physical currency: you trade and work with your own base currency, and deal with any currency pair you wish to.

“Leverage” is the Forex advantage

The ratio of investment to actual value is called “leverage”. Using a $1,000 to buy a Forex contract with a $100,000 value is “leveraging” at a 1:100 ratio. The $1,000 is all you invest and all you risk, but the gains you can make may be many times greater.

How does one profit in the Forex market?

Obviously, buy low and sell high! The profit potential comes from the fluctuations (changes) in the currency exchange market. Unlike the stock market, where share are purchased, Forex trading does not require physical purchase of the currencies, but rather involves contracts for amount and exchange rate of currency pairs.

The advantageous thing about the Forex market is that regular daily fluctuations – in the regular currency exchange markets, often around 1% – are multiplied by 100!

How risky is Forex trading?

You cannot lose more than your initial investment (also called your “margin”). The profit you may make is unlimited, but you can never lose more than the margin. You are strongly advised to never risk more than you can afford to lose.