Introduction to FOREX
What is FOREX?
The term FOREX is the acronym for Foreign Exchange. FOREX Trading refers to an international exchange market where currencies are bought and sold. The foreign exchange market as it is today is made up of all the currencies in the world on a floating exchange rate. Due to recent advancements in technology foreign exchange trading is no longer limited large banks and institutional traders as it was in the past. Today small traders can now access the benefits of FOREX trading by using the various online trading platforms available, to trade with same rates and price movements as the big players who once dominated the market.
Why is the FOREX market a unique one?
It is one of the few markets which can be said to be free of external controls and cannot be manipulated.
It is today the largest financial market in the world, with a turnover of over $3 trillion a day.
The combination of rather constant but small daily fluctuations in currency prices, create an environment which attracts a wide range of investors with a broad range of strategies.
The market is open 24 hours a day, five days a week, and because the relatively limited amount of currencies makes it possible for even the most novice trader to grasp market fluctuations.
How does FOREX Trading work?
Nearly every currency in the world is traded in pairs against other currencies. The four (4) major currency pairs usually used for investment purposes are: Euro against US dollar (EUR/USD), US dollar against Japanese yen (USD/JPY), British pound against US dollar (GBP/USD) and US dollar against Swiss franc (USD/CHF). These transactions take place on various exchanges spread out across the world, the primary ones being New York, London, Sydney, and Tokyo.
Currency pairs are basically the demarcation of the exchange rate between two currencies. The first currency of the pair is the base and each pair is coupled with the latest quote.
Example: GBP/USD 0.6435
The first part (GBP/USD) is the “pair” with the British pound as the baseline. The second part (0.6435) is the “quote”. This tells you “you can get x GBP for 1 USD” or “for each 1 of the base currency, you can get x of the second currency.”
When investing in currency, you are speculating, trying to figure out how one currency will move relative to another currency. The primary goal is to hold a currency that appreciates in value relevant to the other currencies. Here is a simplistic example. If 50 British Pounds were bought for 100 U.S. Dollars, then the Pounds are held for one week, considering that in that period the value of Pounds increased in relation to U.S. Dollars, those Pounds could then be converted back into $120 for example.
With all that said, take note that although Forex trading often yields high returns, it is risky and may not be suitable for all investors.