What Is Forex, Anyway?

Copyright (c) 2008 Orlando Thompson

The FOREIGN EXCHANGE (FOREX, FX) market is not a "market" in the traditional sense. In fact, it is the closest thing to "a perfect market" from a pure economics perspective.

There is no centralized location for trading as there is in other forms of stocks and trading. Trading occurs around the clock over the telephone and on computer terminals at thousands of locations around the world. Foreign Exchange or (FOREX) is also the world's largest trade market.

Daily market turnover has skyrocketed from approximately 5 billion USD in 1977, to a staggering 2.5 trillion (and more) US dollars today. This is more than 100 times the daily turnover of the NASDAQ (what's that worth to you).

Most foreign exchange activity consists of the spot business between the US dollar and the six major currencies (Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar), but the FOREX market is so large, and is hosting so many participants, that no single player, governments included, can directly control or make any significant influence over the direction of the market.

That makes the FOREX market the most exciting market in the world. Central banks, commercial banks, international corporations, money managers, speculators, and even private individuals - are all involved in FOREX trading everyday.

Foreign exchange (FOREX) is the trading of contracts of currency pair exchange rates. It is a NON-DELIVERY trade, which means that there is no physical transaction of currencies, but it is rather an agreement, or "contract" (FOREX DEALS), to trade specific volumes of a pair of currencies at an agreed upon rate.

The magnitude of such FOREX trades is that, in order to make the deal, only a proportional amount is needed (the COLLATERAL, or the MARGIN). Thus, if the currency pair exchange rate has changed by some percentage, the value of the MARGIN invested would accordingly change, however - in a much higher proportion. In fact, the actual change onto the Forex trader's investment (the MARGIN they deposited), will be the nominal change occurred to the exchange rate, multiplied by the MARGIN ratio (the leverage).

Here is an example: a FOREX DAY-TRADING deal that has been made, for buying EUR 100,000 against USD, on an exchange rate of 1.3500. The MARGIN required for this deal (offered by the FOREX Trading Platform) is of a ratio of around 1:100. Accordingly, the trader invests only USD $100. After a few hours, the exchange rate went up to 1.3620. This is an increase of 0.89%, which is quite normal for the global Forex market.

However, thanks to the MARGIN ratio (= the LEVERAGE), the trader's investment went up by 89% (since a leverage of 1:100 has been used)!! Remember: that can happen in less than a day, sometimes in hours or even minutes! The same could happen in the opposite direction, however - the traders cannot lose more than their original MARGIN deposited (in other words we could say: you can profit unlimited amounts, but you can lose not more than 100% of your original investment, in this case $100).

Note that the Forex trader may choose the direction of his deal (for example: either to BUY-EUR or to SELL-EUR in a EUR-USD deal), hence may profit (in case he was right ...) when the EUR goes down. The Forex market offers today FOREX trading not only in MAJORS (the leading world curencies) but also in many other currency pairs (including exotic, gold and silver, etc...). So don't just stand on the side lines wishing you had taken this opportunity to make a fortune, invest now and make is happen for yourself today.

Also remember to take your time when choosing a Forex Trading System because they all may not work to fit your needs. For more on Forex Trading and forex trading systems click the link in the resource box.