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A Guide to Forex Trading

by Dan Ho

It might be surprising for you to hear, but the stock exchanges are far from being the world’s largest financial market even though the media gives the majority of their coverage to the Dow Jones and the NASDAQ.

In fact, the forex market is now the leader in size with over almost $2 trillion in currencies traded daily.

Indeed, ever since 1973 when currencies were permitted to float freely, the forex market has been increasing in volume. While once almost exclusively the province of large financial institutions and banks, online forex trading by individual speculators is becoming the hottest game in town.

For those who are totally new to forex trading, here's some background:

Forex entails interchanges of the world’s major currencies, such as the United States Dollar, the Swiss Franc, the Euro, the Japanese Yen, and the British Pound. It is a huge international market that consists of major financial institutions, businesses and governments.

The majority of forex trading is between an estimated 300 sizeable international banks. Forex provides a form of protection for these major financers from the daily fluctuations in currency values, by enabling them to govern the risks involved with international trading.

Profits are made through the act of buying one currency while simultaneously going short another. All online forex trading involves a pair of currencies because currencies trade in relation to one another. For example, one can buy the US dollar while simultaneously shorting the british pound if one thinks the US dollar is going to rise in value in relation to the pound.

One can go long US dollars and short Japanese Yen, as another example.

Stated differently, it's not just a matter of going long or going short the US dollar. Forex trading, again, is always in relation to another currency since the values of currencies are relative figures.

One reason people get involved in forex trading is because of the massive leverage inherent in trading currencies. It's quite common to trade at 25 and 50 times leverage! Huge opportunities for profits (and also losses) therefore exist in online forex trading, and one should be keen on these risks before getting involved.

This is precisely why getting a proper forex education is crucial.

Many things influence the price of currencies.

As just one example, confidence in a particular currency (and therefore value at any givent ime) depends upon the confidence that people have in the country, whether it be people living in that country or people in the international community. When the people, or investors, lose confidence in that country, then that country’s currency may depreciate rapidly.

Indeed, in 1992 the speculator George Soros made a billion dollars from shorting the british pound because of actions taken by the british government that the market neither believed or liked.

In summary, within the forex market, currencies are priced and traded in pairs. While buying one currency, you actively sell another at the same time. The determination of which pair of currencies you wish to trade lies completely in the investor’s control.

The objective is best described as trading one currency for another in the hopes that the market rate will fluctuate in your favor so that the currency you exchanged will increase its value in relation to the one you sold.

Forex trading is not limited to office towers; investors can interact electronically between a network of banks. Small investors appreciate the easy access the market provides, including the flexible 24 hour operating time which allows the investor the ability to determine what days are most convenient for online forex trading.

As with any investments, there are certain disadvantages to the exchange market, namely the enormous leverage that can cut both ways in online forex trading.

The other disadvantage is that forex requires a longer learning curve so someone just gettind started in the game than equities or options do.

To be sure, forex trading can seem overwhelming to someone new to the game, but through proper training and knowledge it is possible to have a wildly successful and profitable relationship with the Foreign Currency Exchange Market.