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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