Online FOREX Currency Trading

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Foreign Exchange (FOREX or FX) refers to the trading of one currency against another.

Founded in the 1970's with the introduction of free exchange rates, the international FOREX market is HUGE. It is the world's largest financial market in which an estimated 1.5 Trillion US dollars a day are traded - over 10 times bigger than the combined value of daily trading on all the world’s stock markets.

For better or worse we live in a global economy in which different nations constantly trade with one another. In order to do so they must continuously exchange one currency for another. However, even the vast volume of global trade is dwarfed by currency speculation in which traders buy and sell currencies in order to profit from exchange rate movements. In most cases speculators have no intention of taking delivery of their purchases.

The FOREX market is open 24 hours a day around the globe (from 5pm Sunday to 4pm Friday EST). It is also extremely liquid, with transactions being conducted in seconds.

Traditionally FOREX trading has been the reserve of the major financial institutions with access to up-to-the-minute information and real-time trading tools.

The evolution of the personal computer and the Internet has now made the benefits of FOREX trading available to the small, home-based investor.

Advantages of FOREX trading

Individual investors benefit from:

• Real-time information via the 'net.

• Real time trading on the 'net.

• Sophisticated market analysis aids.

• Low entry costs, some institutions will open "mini" FOREX accounts with as little as $1000 (USD) - or even less!

• Leverage of up to 200:1 This means you can trade with up to 200 times the amount you have in your account. This leverage heavily magnifies gains. It can also produce heavy losses, but this risk can be mitigated by using a STOP LOSS.

• Automatic stop-losses to minimize risk while maximizing profit potential. A stop loss stipulates the MAXIMUM amount your are prepared to lose on a trade. Some good advice: ALWAYS use a stop loss.

• Commission free trading, institutional profits come from the slight difference between buying and selling prices or "spread" (often less than 0.03%).

Many FOREX trading facilities offer Free demo accounts to the small investor, enabling you to get a feel for trading at no risk.

FOREX is NOT Easy Money. To trade successfully it is necessary to acquire a thorough knowledge of the fundamental and technical principles affecting the market. There is also some risk that highly-leveraged trades may be wiped out by slight adverse market movements. However, for those that are prepared to acquire the necessary skills FOREX can provide a healthy primary or secondary source of income.

How FOREX Works

Numerous currencies are used throughout the world, all of which are traded to some degree. However the most widely traded currencies, known as the majors, are the US dollar (USD), Euro (EUR), Japanese Yen (JPY), Great British pound (GBP), Swiss Franc (CHF), Canadian dollar (CAD) and Australian dollar (AUD). Note the 3-character codes shown in brackets and used widely in FOREX trading.

Beginners in FOREX trading would be well advised to stick to these currencies for two reasons. Firstly, they enjoy high liquidity, meaning it is virtually always possible to place a trade, and secondly the retail brokers offer lower spreads on trades involving the majors, thus the difference between the buying and selling price is lower. It may also be harder to find a retail broker willing to offer trading in the more esoteric currencies.

Currency Pairs

Unlike stocks, every currency trade involves the simultaneous buying of one currency and selling of another. The two currencies involved in a trade are expressed as a currency pair. Widely traded currency pairs include EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, and USD/CAD.

The first currency listed in the pair is known as the base currency. The second currency is the quote currency. The quoted price for a currency pair shows how much one unit of the base currency is worth in terms of the quote currency, eg if GBP/USD = 1.8987 it means that one Great British pound will buy 1.8987 US dollars.

In actuality, retail brokers quote two prices for each currency pair, a bid price and an ask price. For example GBP/USD may have a bid price of 1.8989 and an ask price of 1.8993. The ask price is your buying price, and the bid price is your selling price. The difference between the two is known as the spread and is the means by which the broker earns its profit. In choosing a broker a significant factor is the bid/ask spread.

Would-be traders should be aware that in dealing with a retail broker they will not be dealing directly with the interbank market, ie the market in which major financial institutions trade FOREX with one another. The small trader is essentially dealing with his/her broker. In practice this shouldn't be a problem since modern computer systems are constantly scanning FOREX rates and should any broker fall out of line with the global market arbitrageurs would swiftly step in to punish the discrepancy.

If you think the base currency will appreciate against the quote currency you buy the currency pair. However, if you think the quote currency will appreciate against the base currency (ie the base currency will depreciate) you sell the pair.

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