About Investing in Forex
Foreign exchange, or forex, is one of the most liquid and volatile speculative marketplaces in the world. This creates significant opportunity for successful traders to make money. However, it also makes forex one of the riskiest investment markets. This is why forex brokers and advisers issue disclaimer statements on their websites and articles indicating that forex poses significant risk of loss and is not for everyone.
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Basics
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Foreign exchange describes the simple process of converting one country's currency to another country's currency. This currency conversion process has been important to the global marketplace and global businesses for a long time. Forex evolved as a speculative market as investors realized the opportunity to invest in the fluctuating prices of one currency relative to another. As of 2011, actual foreign business trade accounts for only about 5 percent of currency exchange, notes Forex.com, compared with 95 percent of currency exchange occurring via speculation.
The Marketplace
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Forex.com indicates that daily turnover, or exchange, of currencies has a value of $3.2 trillion, as of 2011. Some estimates indicate as much as $4 trillion in currencies trades hands every daily. One of the main appeals of forex is that it offers a 24-hour-a-day marketplace from 5 p.m. eastern time Sunday to 5 p.m. eastern time Friday. This is because forex is a true global marketplace with major exchanges in Sydney, Tokyo, London and New York connected electronically through the global interbank.
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Currency Pairs
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Unlike other investments that involve one price quoted for the purchase or sale of an asset, currency trading is based on the relative value of one currency to another. These currency pairs typically involve several of the most popular currencies. Forex.com refers to "The Majors" as the US dollar, Japanese yen, euro, British pound, Swiss franc, Canadian dollar and Australian dollar. These currencies make up 85 percent of daily forex trading. A currency pair is designated as one currency's value express in another. For instance, the US dollar paired with the Japanese yen is noted as USD/JPY. Each currency is shown with a three-letter trading symbol.
Making Money
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Currency traders use both short-term and long-term strategies. Currency trading is known as a market that requires disciplined trading and controlled emotions. Successful traders carefully plan entry points and exit points. If a trader wants to buy the USD/JPY, he believes the dollar is going to rise in value against the yen. Shorting, or selling, this pair indicates a belief the dollar will fall against the yen. Traders make money by accurately forecasting price movement and optimizing profits. When the pair moves opposite the trade, the potential for loss exists. Disciplined traders set stop-loss orders to minimize losses on bad trades. This is critical to preserve account funds for further investment.
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References
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