| The Forex market is used to trade one | | | | Many speculators are day traders, meaning |
| currency against another. The professionals | | | | that they set out to take advantage of |
| refer to this as foreign exchange, more | | | | regular market movements over very short time |
| commonly referred to as Forex or FX trading. | | | | periods, often buying a currency and then |
| This is an international market covering the | | | | selling it again very soon afterwards |
| entire planet, and has no specific central | | | | (sometimes in just a few seconds). |
| exchange, unlike all the other financial | | | | |
| market you can think of. It is also the | | | | Until a few years ago the Forex market was |
| biggest markets you can imagine, with almost | | | | very difficult if not impossible to enter for |
| 2 trillion dollars changing hands daily | | | | an individual trader, because of the huge |
| (that's an awful lot of zeros)) | | | | investment and very expensive facilities |
| | | | needed. The market was totally the preserve |
| Why do we need a Currency Exchange? Well, An | | | | of the big banks and other huge institutions. |
| international currency exchange is necessary | | | | |
| in many situations:- | | | | There has been an explosion in interest in |
| | | | trading the Forex markets over the last two |
| Consumers will come into contact with a | | | | or three years, as single individuals have |
| currency exchange whenever they travel | | | | learned that they too can set up and compete |
| abroad. They go to their bank or a local | | | | on equal terms with the huge trading |
| exchange bureau to convert one currency | | | | corporations. Individuals working from home, |
| (usually their home currency) into another | | | | using a desktop pc and an internet connection |
| (the currency of the country they intend to | | | | can now download the training and expertise |
| visit) so that they can buy goods or services | | | | they need, together with the trading software |
| in that country. Consumers often purchase | | | | and forex data feeds they also require, and |
| goods in a foreign country using their credit | | | | soon be running their new business - often |
| cards. They will find that their credit card | | | | making more money than they could ever have |
| company will convert the amount they paid in | | | | managed if they had been working for one of |
| the foreign currency to their local currency, | | | | those huge corporations referred to earlier |
| and will appear on their credit card | | | | (and keeping all of it). |
| statement at the converted rate. Although | | | | |
| each such currency exchange is tiny, the sum | | | | FX Traders are attracted to currency trading |
| total of all the millions of such | | | | for several reasons, including:-the |
| transactions every day is very significant. | | | | volatility of the market, which gives them |
| | | | regular opportunities to earn money.the |
| Businesses must convert currencies when they | | | | enormous liquidity of the markets. Unlike |
| conduct business outside their own country. | | | | most other markets, there is just so much |
| For example, if they export goods to another | | | | money in the system at any one time that it |
| country and receive payment in that country's | | | | is hard to imagine a situation where you |
| currency, the payment must be converted back | | | | could not trade.the currency exchanges are |
| to their own home currency. If they import | | | | open 24 hours a day. From Monday to Friday, |
| goods or services, then businesses will often | | | | 24 hours per day, the market is active and |
| have to pay in a foreign currency, which | | | | money can be made.currencies can now be |
| requires them to first convert their local | | | | traded with no brokerage charges. Nowadays an |
| currency into a foreign currency. Big | | | | account with a spread trader can be set up |
| companies convert huge amounts of currency | | | | and funded in seconds, and the only charge is |
| every year, often tens of billions of | | | | the spread or difference between the buying |
| dollars. The timing of these transactions can | | | | and selling price, which can be as low as 2 |
| have a huge effect on their balance sheet and | | | | pips (pip is the smallest unit traded, and |
| overall profits. | | | | you can often trade as low as one or two |
| | | | dollars per pip). |
| Commercial and Investment Banks trade | | | | |
| currencies to support their banking | | | | Very low entry costs. A newcomer can enter |
| processes. They also use the currency markets | | | | the market for as little as the cost of a PC, |
| for hedging and trading purposes. | | | | some training books, videos and software, |
| | | | probably one or more trading systems to get |
| Governments and central banks trade | | | | him started, and a datafeed to provide |
| currencies to improve national trading | | | | instant currency prices (good free ones are |
| conditions or to manipulate or adjust | | | | available too). Probably less than a thousand |
| economic and/or financial imbalances. | | | | bucks for a genuine business that (if you are |
| Although they do not take part for | | | | successful) can produce an extremely good |
| speculative reasons they are often very | | | | lifestyle. |
| profitable, because they usually trade on a | | | | |
| medium to long-term basis. | | | | Even lower ongoing costs. No staff, no |
| | | | offices, no expensive travel (unless you want |
| Investors and/or speculators (traders) | | | | to). Costs are limited to broadband running |
| require currency exchange whenever they trade | | | | cost, a little electricity, and lots of |
| a foreign investment, whether it is in | | | | coffee. |
| equities, bonds, bank deposits, or real | | | | |
| estate. If a Swiss investor buys shares in an | | | | Tax-free status. In my country at least (The |
| American company on the NASDAQ exchange, he | | | | UK) I pay no tax on my trading income. With |
| must pay for the shares in U.S. Dollars. | | | | tax at 40% on earned income here, this means |
| He'll probably have to convert Swiss francs | | | | that instead of getting just 60 bucks out of |
| to U.S. Dollars to complete the deal. | | | | every 100 bucks I earn, I keep the lot. And |
| Similarly, an English real estate investor | | | | this equates to around 66% extra income (60 x |
| selling a New York property will need to | | | | 1.66 = 100). Now that's an incentive! |
| convert the proceeds of the sale from U.S. | | | | |
| Dollars to British Pounds. | | | | So if you are thinking of trading as a way of |
| | | | earning an online income, I say, come on in, |
| Because the value of a currency continuously | | | | the water's lovely. And if you are thinking |
| varies against all the other currencies, | | | | that maybe you aren't cut out for this sort |
| investors and traders can trade these | | | | of thing - no math qualifications, no talent |
| currencies directly in order to profit from | | | | with numbers, I say rubbish! |
| their movements. For example, if an English | | | | |
| investor has an opinion that the Japanese | | | | It will cost you very little to find out if |
| economy is strengthening and expects the Yen | | | | you are cut out for a trading life or not, |
| to rise in value (i.e., go up relative to | | | | certainly less than getting into internet |
| other currencies including the pound), then | | | | marketing or establishing an offline business |
| he will want to buy Japanese Yen, taking what | | | | only to find you don't like it or can't cut |
| traders refer to as a long position | | | | it. You could even surprise yourself. |
| (expecting a rise). Similarly, if an American | | | | |
| investor believes that the Euro is about to | | | | Some of the very best traders I know are |
| go down, he may sell the Euro to take a short | | | | really average, self-taught folk who didn't |
| position (expecting a decrease in value). To | | | | think for a single moment that they could |
| square his position and get out of the trade, | | | | handle forex trading. Oh, and many of them |
| he will later buy the euros he sold earlier, | | | | are women! |
| but at a much lower price. Therein lies his | | | | |
| profit. Importantly, investors and traders | | | | This is the first of a short series of |
| can profit whether currencies becoming | | | | articles aimed at introducing newcomers to |
| stronger (by taking a long position) or get | | | | internet-based forex trading. The follow-on |
| weaker (by taking a short position). | | | | articles will be launched at regular |
| | | | intervals. |