An Introduction To Foreign Exchange Trading - aka Forex Or FX
By Frank Adams
Foreign Exchange Trading (Forex or FX) trading refers to the buying and selling of the world’’s numerous currencies. As you probably know, all currencies are interchangeable. However, their value relative to each other is not the same. Their relative value is determined on how well their economies are doing. For example, the number of US dollars required to buy a Euro would be around one or two, at most. However, a million Zimbabwean dollars would probably not be sufficient to buy a dollar. This is because, compared to the US economy, the economy of Zimbabwe is very weak.
There is a simple reason for the link between the state of the overall economy and the value of the currency of a country. If the economy is doing very well, this means that the country is producing a lot of goods and services that are being bought by people, both domestic and foreign. This means that people will need to buy these products and services. They will thus need the currency of that nation to buy its products. Demand for this currency will go up as people will convert other currencies to this one. Hence, the value of the currency will rise compared to other currencies.
The Forex market is certainly the world’’s largest financial market, with over USD 3 trillion being traded every day. Over 90% of this amount is purely speculative, that is, traders trying to make a profit over the changes in the market. Very little business represents the currency conversion needs of people, companies and governments. Another important characteristic of this market is that there is no central exchange (like the stock exchanges). In fact, trading occurs over the interbank market. Trading takes place directly between the buyer and the seller, usually over the telephone or through the Internet. However, the main centres of trade are Sydney, London, Tokyo, Frankfurt and New York.
The trader makes a profit through the ever changing currency values. For example, if he is trading in EURUSD (Euro-dollar), he will buy the Euro when the price is falling and sell the dollar. When the dollar price of the Euro rises again, he will sell it to make a profit. The advantage of forex trading with respect to other types of trading such as stock trading is that a currency has many values as opposed to a stock. For example, the value of the USD will be different with respect to the EUR and the JPY. The trader therefore has more leeway in his trade and more opportunities to make profit.
In order to be a successful trader, however, some knowledge of the shifts in currency value is essential. This is achieved by studying the markets of the currencies you would be trading with. In other words, you would need to study reports on the economy of that market on virtually a 24/24 basis (since the forex market is truly global, there is no halt to trade). Is the price of oil rising? What will the impact on the currency be? Are exports on the rise? Answers to such questions will enable you to decide which way the market is likely to move.
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