If you have seen ads on TV, on the internet or in magazines for forex trading, you may be wondering what is forex. The word forex is short for foreign exchange, which is the exchange of one currency for another on the world's currency markets. It is sometimes shortened even more to FX.
Many people already have some knowledge of exchanging currencies when they are going to an other country for business or on vacation. You probably realize as well that the financial institutions are constantly changing money for businesses who have an import from or export to foreign countries. Even so, an estimated 70%-90% of currency trades are speculative. This means that the person or institution making the exchange has no intention of taking delivery of the currency that they have bought, but plans to trade it back at a profit. This is foreign exchange or currency trading.
Most of the world's currencies no longer have a fixed exchange rate, so their quotes or prices are constantly fluctuating. When a country is experiencing an economic prosperity its currency value will usually be strong, or high. When a country has an economic depression, its currency will usually drop too.
Since small changes in values are happening all the time to every currency, there is a lot of potential for foreign exchange traders to make profits by buying a currency whose price is moving up in exchange for one whose price is falling. Dissimilar to stocks, you are always dealing with a pair of currencies because you need to give money in one currency to get it in another. Each currency is indicated by three letters and the major pairs will look like this: EUR/USD (euro/US dollar), GBP/JPY (British pound, Japanese yen) etc.
Unlike stocks of course you do not get any dividends on a currency investment. You have to act on rising and falling price movements or economic and financial news to choose when to buy and sell. You then close the trade by exchanging the opposite way and if the market has moved far enough in the direction you expected, you will come out with a gain.
Until recent years the market was entirely in the hands of banks and financial institutions with large investment funds but the development of the internet has meant that individual investors can enter the markets via their home computer.
You need a broker and there are many who cater to the independent trader by offering mini forex trading accounts so that you may start up with just a few hundred dollars. A more significant starting fund is recommended. Like all speculative trading, this is a risky form of investment so you should only be risking the money that you do not need for other purposes. Fortunately, most brokers offer free virtual accounts where you can learn trading skills by training in demonstration mode before you ever risk a real cent.
Besides practicing on a demo account, what can be very valuable is using forex signals in your trading. Forex signals are basically market forecasts and trading recommendations from a currency market expert or a professional trader. There are a lot of forex signal providers available online. But always check the track record first, as only reliable forex signals will make you money, not losers.
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