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Forex Trading
“Forex” – sometimes capitalized “FOREX” and often abbreviated “FX” or “spot” – stands for the “Foreign Exchange market” that is actually the largest financial market in the world. Most people on the street are completely unaware of this marketplace, although it does a daily trading volume of over $2 trillion. Compared to the $25 billion daily volume of the New York Stock Exchange (NYSE), Forex trading really is gargantuan.
Forex trading actually adds up to over three times the total value of the stocks and futures markets combined. There is money to be made in Forex trading, but it is not the place for either neophytes or the faint of heart. It is serious, serious business.
What’s traded?
The short answer is the best. Forex trading is all about money, meaning national currencies – specifically the simultaneous buying of one currency and selling of another. Currencies have to be traded through brokers, and are always traded in pairs. Common pairings, for example, are the Euro (EUR) with the US dollar (USD) or the British pound (GBP) and the Japanese yen (JPY).
Simply put, the “exchange rate” of a currency (versus other currencies) embodies the financial markets’ judgments of that particular country’s economy (compared to the other countries’ economies). You are effectively buying into the comparison and competition between countries and economies through Forex trading.
Of course, you are not buying anything “solid” so Forex trading might potentially confuse a newcomer. The best analogy is that you buy a currency as a “share” in a particular nation, more specifically in that nation’s economy and financial future. Buying Swedish krona, for instance, means you are actually buying shares in the Swedish economy. The trading price of the krona is a simple, direct measure of how “the market” diagnoses and evaluates the current and future performance of the Swedish economy.
Where’s the Forex office?
Financial markets like the Tokyo Stock Exchange and the NYSE have office buildings, employees and corporate-type structures. On the other hand, Forex trading takes place in a virtual market with no physical location and no single, centralized staff or computer banks. In fact, the Forex market is legally defined as an Over-the-Counter (OTC) or “Interbank” market and is run electronically, by a network of different banks, on a continuous, 24/7/265 basis.
Only institutional investors (“the Street”) were doing Forex trading until the late 1990’s, as one of the initial requirements was a trading account funded with millions of dollars. Forex trading was originally designed for use by multinational banks, governments and other large institution, not day traders and investment clubs.
Once again, it was “technology to the rescue,” as the Internet and powerful personal computers opened the financial markets to greater and greater individual participation. Today there are numerous online Forex trading firms that offer trading accounts to “retail” traders – like you. By aggregating small accounts, these firms can put your dollars to work the same way that “the big guys” do.
Careful now!
To get started in Forex trading, you just need a computer, a (preferably high-speed) Internet connection – and a lot of good information, of course, along with some sound financial judgment. There are any number of sites on the Internet that will teach you Forex trading, but it is not something that should be entered into lightly.
Even more so than with “regular” day trading of stocks, Forex trading is fraught with peril and is no place for the uninitiated or anyone looking to make a quick fortune. You can easily lose everything you have with one ill-advised trade, so the most important thing to do is be honest with yourself about your currency trading abilities.
If you visit a Forex trading (or “training”) site and the terminology still confuses you an hour later, it is probably something you should not attempt. If you are an experience day trader who wants to chart a new course, though, it might pay you to investigate the Forex markets as part of your overall investment strategy.
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