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If you have seen ads on TV, on the internet or in magazines for forex trading, you could be wondering what is forex. The word forex is short for foreign exchange, which is the exchange of one currency for another on the international money markets. It is frequently shortened even further to FX.
Many people already have some involvement of exchanging currencies when they are going to an other land for business or on vacation. You probably recognize as well that the banks are regularly changing money for businesses who have an import from or export to foreign countries. Even so, an estimated 70%-90% of currency deals are speculative. This means that the individual or institution making the exchange has no intention of taking delivery of the currency that they have ordered, but wants to trade it back at a profit. This is forex or currency trading.
Most of the world's currencies no longer have a fixed exchange rate, so their values or prices are continually fluctuating. When a land is experiencing an economic boom its currency value will typically be strong, or high. When a country has an economic depression, its currency will typically decline too.
As little changes in exchange rates are happening every minute to each currency, there is a lot of potential for forex traders to make money by buying a currency whose price is surging in exchange for one whose price is sliding. Unlike with other securities, you are always dealing with a pair of currencies because you have to give money in one currency to get it in another. Each currency is represented by three letters and the main crosses will look like this: EUR/USD (euro/US dollar), GBP/JPY (British pound, Japanese yen) etc.
Unlike stocks of course you do not receive any dividends on a currency position. You have to act on rising and falling trends or economic and financial news to consider when to buy and sell. You then close the deal by exchanging the opposite way and if the market has moved substantially in the direction you anticipated, you will come out with a profit.
Until nowadays the market was entirely in the hands of banks and other institutions with large investment funds but the development of the internet has meant that retail investors may enter the markets via their home computer.
You need a broker and there are many who cater to the smaller trader by providing mini forex trading accounts so that you can start up with just a few hundred dollars. A larger starting capital is recommended. Like all speculative trading, this is a risky form of investment so you should only be trading with money that you do not need for other purposes. Luckily, most brokers offer free virtual accounts where you can learn trading skills by practicing in demonstration mode before you ever risk a real cent.
In addition to practicing on a demo account, what can be very useful is using forex signals in your trading. Forex signals are basically price forecasts and trading recommendations from a forex market expert or a professional trader. There are many forex signal providers available online. But always check the past performance first, as only reliable forex signals will make you money, not losers.
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