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If you have seen ads on TV, on the internet or in magazines for forex trading, you may be wondering what is forex. The word forex is an abbreviation for foreign exchange, which is the exchange of one currency for another on the global money markets. It is frequently shortened even more to FX.
Many people already have some knowledge of exchanging currencies when they are going to an other country for business or on vacation. You most likely find out as well that the banks are regularly changing money for businesses who have an import from or export to foreign countries. Even so, an estimated 70%-90% of currency trades are speculative. This means that the person or institution making the transaction has no plan of taking delivery of the currency that they have ordered, but wants to trade it back at a profit. This is foreign exchange or currency trading.
Most of the world's currencies no longer have a fixed exchange rate, so their quotes or prices are constantly oscillating. When a nation is experiencing an economic boom its currency value will in most cases be strong, or high. When a country has an economic depression, its currency will usually drop too.
Since minor changes in exchange quotes are happening every minute to each currency, there is a lot of potential for foreign exchange traders to make profits by buying a currency whose price is rising against one whose price is decreasing. Unlike with other securities, you are always dealing with a pair of currencies because you need to give money in one currency to get it in another. Each currency is indicated by three letters and the major pairs will look like this: EUR/USD (euro/US dollar), GBP/JPY (British pound, Japanese yen) etc.
Unlike stocks certainly you will not receive any dividends on a currency position. You have to act on rising and falling price movements or economic and financial news to conclude when to buy and sell. You then close the trade by exchanging the opposite way and if the market has moved far enough in the direction you predicted, you will end up with a profit.
Until nowadays the market was entirely in the hands of banks and financial institutions with large investment funds but the development of the internet has meant that individual investors can enter the markets via their home PC.
You need a broker and there are several who cater to the smaller trader by providing mini forex trading accounts so that you may start up with just a few hundred dollars. A more significant starting fund is recommended. Like most speculative trading, this is a risky type of investment so you should only be trading with money that you do not need for other purposes. Luckily, most brokers offer free virtual accounts where you can learn trading skills by training in demonstration mode before you ever risk a real cent.
Besides practicing on a virtual account, what can be extremely useful is using forex signals in your trading. Forex signals are basically price forecasts and trading recommendations from a currency market expert or a professional trader. There are a lot of forex signal providers available online. But always check the track record first, as only reliable forex signals will make you money, not losers.
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