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Introduction To Forex
By: Ron King
The Foreign Exchange Market, better known as FOREX, is a worldwide market for
buying and selling currencies. It handles a huge volume of transactions 24 hours
a day, 5 days a week. Daily exchanges are worth approximately $1.5 trillion (US
dollars). In comparison, the United States Treasury Bond market averages $300
billion a day, and American stock markets exchange about $100 billion a day.
The Foreign Exchange Market was established in 1971 when fixed currency
exchanges were abolished. Currencies became valued at 'floating' rates
determined by supply and demand. The FOREX grew steadily throughout the 1970's,
but with the technological advances of the 80's FOREX expanded from trading
levels of $70 billion a day to the current level of $1.5 trillion.
Who Trades in FOREX?
The FOREX is made up of about 5,000 trading institutions such as international
banks, central government banks (such as the US Federal Reserve), and commercial
companies and brokers for all types of foreign currency. There is no centralized
location of FOREX; major trading centers are located in New York, Tokyo, London,
Hong Kong, Singapore, Paris, and Frankfurt. All trading is done by telephone or
Internet. Businesses use the market to buy and sell their products in other
countries, but most of the activity on the FOREX is from currency traders who
use it to generate profits from small movements in the market.
Even though there are many huge players in FOREX, it is accessible to the small
investor thanks to recent changes in the regulations. Previously, there was a
minimum transaction size and traders were required to meet strict financial
requirements.
With the advent of Internet trading, regulations have been changed to allow
large interbank units to be broken down into smaller lots. Each lot is worth
about $100,000 and is accessible to the individual investor through 'leverage'
loans extended for trading. Typically, lots can be controlled with a leverage of
100:1 meaning that US$1,000 will allow you to control a $100,000 currency
exchange.
Advantages to Trading in FOREX
Liquidity - Because of the size of the Foreign Exchange Market, investments are
extremely liquid. International banks are continuously providing bid and ask
offers and the high number of transactions each day ensures there is always a
buyer or a seller for any currency.
Accessibility - The market is open 24 hours a day, 5 days a week. The market
opens Monday morning Australian time and closes Friday afternoon New York time.
Trades can be done on the Internet from your home or office.
Open Market - Currency fluctuations are usually caused by changes in national
economies. News about these changes is accessible to everyone at the same
time--there can be no 'insider trading' in FOREX.
No Commission - Brokers earn money by setting a 'spread'--the difference between
what a currency can be bought at and what it can be sold at.
How does it work?
Currencies are always traded in pairs: the US dollar against the Japanese yen,
or the English pound against the euro. Every transaction involves selling one
currency and buying another, so if an investor believes the euro will gain
against the dollar, he will sell dollars and buy euros.
The potential for profit exists because there is always movement between
currencies. Even small changes can result in substantial profits because of the
large amount of money involved in each transaction. At the same time, it can be
a relatively safe market for the individual investor. There are safeguards built
in to protect both the broker and the investor, and a number of software tools
exist to minimize loss.
Copyright 2005 Ron King.
About the Author:
Ron King is a full-time researcher, writer, and web developer. Visit
www.forex4u-now.com to learn more about this fascinating investment
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