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CopticWeb Cool Tips |
An overview of the Forex
market
 The Forex 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 dealers.
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 trading
The 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 particular currency.
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