What Is Forex Trading?
An Overview into the Foreign Exchange (Forex) Market
Foreign Exchange (Forex) Trading is a nonstop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously
bought and sold across local and global markets while traders increase or decrease value of an investment upon currency movements. Foreign exchange market conditions can change
at any time in response to real-time events.
 The main enticements of currency dealing to private investors and attractions for short-term Forex trading are:
 24-hour trading, 5 days a week with nonstop access to global Forex dealers.
An enormous liquid market making it easy to exchange most currencies.
Volatile markets offering profit opportunities.
Standard instruments for controlling risk exposure.
The ability to profit in rising or falling markets.
Leveraged trading with low margin requirements.
Many options for zero dealing commission.
Forex Trading
 For the investor, the goal of Forex trading is to achieve a profit following foreign currency movements. Forex trading
or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate"
or in short - "rate". If the investor bought 1000 Euro, s/he would have paid 1085.70 U.S. Dollars. A year later, the Forex rate was 1.2083, which means that the value of the Euro
(the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor can now sell the 1000 Euro in order to receive 1208.30 dollars. Accordingly, the investor is left
with $122.60 more than what he had started with the previous year. However, to know if the investor made a good investment, s/he needs to compare this investment option to alternative
investments. At the very minimum, the return on investment (ROI) should be compared to the return of a "risk-free" investment. An example of risk-free investment is long
dated U.S. Government bonds since there is practically no chance for a default, i.e. the U.S. Government going bankrupt or being unable or unwilling to pay its debt obligation.
While trading on Forex, trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does
increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular
currency pair and has not yet sold or bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, in the end, the person or institution that bought or sold the currency has no plan to
take delivery of the currency; rather, they were solely conjecturing the movement of that particular currency.
Exchange Rate
As currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. Majority of the currencies are traded
against the US Dollar (USD). The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF). These four currencies make up
the majority of the market and are called major currencies or the majors. Some sources also include the Australian Dollar (AUD) within the group of major currencies.
The first currency in the exchange pair is referred to as the base currency and the second currency as the counter or quote currency. The terms currency is thus the numerator and the
base currency is the denominator. The exchange rate tells a buyer how much needs to be paid in the counter or quote currency to obtain one unit of the base currency. The exchange rate
also tells a seller how much is received in the counter or quote currency when selling one unit of the base currency. For example, an exchange rate EURO/USD of 1.2083 specifies to the buyer
of Euro that 1.2083 USD needs to be paid in order to obtain 1 Euro.
At a given point, time and place, if an investor buys any currency and immediately sells it (assuming no currency change has occurred), the investor will lose money. The underlying
reason is that the bid price, representing how much will be received in the counter or quote currency when selling one unit of the base currency is always lower than the ask price, which
represents how much has to be paid in the counter or quote currency when buying one unit of the base currency. For instance, the EUR/USD bid/ask currency rates at your bank can be 1.
2015/1.3015, representing a spread of 1015 pips, which is very high in comparison to a bid/ask currency rates that online Forex investors are used to such as 1.2015/1.2020, with a spread of
5 pips. In general, lower spreads are better for Forex investors since even they require a smaller movement in exchange rates in order to be making money by exchanging currencies.
Margin
Banks and/or online trading providers need collateral to ensure that the investor can pay in case of a loss. The collateral is referred to as Margin and is also known as minimum security
on the Forex. In practice, it is a deposit to the trader's account that will cover against any currency-trading losses in the future.
Margin enables private investors to trade in markets with high minimum units of trading by allowing traders to hold a position much larger than account value and Margin trading enhances
the rate of profit, but Margin trading has the tendency to inflate rates of loss, on top of systemic risk.
Leveraged Finance
Leveraged finance with credit, such as that purchased on a margin, is very common in Forex. The loan/leveraged in the margined account is collateralized by your initial deposit. This may
result in being able to control $100,000 for as little as $1,000.
Five Ways private investors can trade directly or indirectly in FOREX:
The spot market
Forwards and futures
Options
Contracts for difference
Spread betting
A spot transaction
A spot transaction is a straightforward exchange of one currency for another. The spot rate is the current market price, the benchmark price. Spot transactions do not require immediate
settlement, or payment "on the spot." The settlement date, or "value date," is the second business day after the "deal date" (or "trade date")
on which the transaction is agreed to by the two traders. The two-day period provides time to confirm the agreement and arrange the clearing and necessary debiting and crediting of bank
accounts in various international locations.
Risks
Although Forex trading can lead to very profitable results, there are risks involved: exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80% of all
currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators
heavily influence entry, exit and order placement decisions.
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