What is Forex and how does it work

For those unfamiliar with the word, Forex (Foreign Exchange market), refers to foreign exchange market where currencies are bought and sold. The foreign exchange market is an international decentralized marketplace that decides the relative values of different currencies.

FOREX is a quite exclusive market for a couple of reasons. First of all, it is one of the few markets in that it is free of external controls and that it cannot be manipulated. Forex is also the biggest liquid monetary market, with trade reaching 5 trillion US dollars a day. With this a lot of money moving this fast, it is obvious why a single investor would find it near unattainable to significantly influence the price of a major currency. Moreover, the liquidity of the market signifies that unlike some seldom traded stock, forex traders are able to open and close positions within a few seconds as there are always agreeable buyers and sellers.

Another pretty unique feature of the Forex is the variance of its participants. Traders find a number of causes for joining the market, some as longer term hedge investors, while others employ huge credit lines to seek great short term gains. Amazingly, the combination of pretty constant but small regular fluctuations in currency prices, make an environment which attracts investors with a wide range of strategies.

How Forex Works:
Dealings in foreign currencies are not centralized on an exchange, unlike say the NYSE, and hence take place all over the world online. Trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). There are dealers, in almost every time zone around the world, who will quote all major currencies. After choosing what currency the traders wants to trade, he or she does so via one of these dealers.

Marginal Trading:
Marginal trading is basically the term used for trading with borrowed funds. It is interesting because of the fact that in Forex funds can be managed without a real money supply. This allows traders to invest much more capital with less transfer costs, and open larger positions with a much smaller amount of initial capital. Accordingly, one can perform pretty large transactions, very fast and cheaply, with a small amount of actual capital. Marginal trading in foreign exchange market is calculated in lots. The term “lot” refers to about $100,000, an amount which can be taken by putting up as small as 0.5% or $500.

EXAMPLE: You suppose that signals in the market are signifying that the British Pound (GBP) will increase against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and expect the exchange rate to get higher. Fortunately, your predictions come true and you prefer to sell. You close the position at 1.5050 and gain 61 pips or about $405. Accordingly, on an initial funds investment of $1,000, you have made over 40% in profits.

Once you decide to close a position, the deposit amount that you initially made is returned to you and a sum of your losses or profits is done. This loss or profit is then credited to your account.

Trading Strategies: Technical Analysis and Fundamental Analysis

The two general fundamental strategies in investing in Forex are Fundamental Analysis and Technical Analysis. Most medium and small sized investors in financial markets perform Technical Analysis. That is to say, that all issues which have an effect on the price movement have already been calculated by the market and are hence reflected in the price. Basically then, what this type of investor does is depend his/her investments upon three fundamental theories. These are: the movement of the market considers all factors, the movement of prices is determined and clearly tied to these actions, and that history repeats itself. Someone using technical analysis looks at the lowest and highest prices of a currency, the opening and closing prices, and the volume of transactions. Trader does not try to defeat the market, or even forecast major long term trends, but simply looks at what has occurred to that currency in the recent past, and forecasts that the small fluctuations will usually continue just as they have before.

Fundamental Analysis in forex trading is analyzing the current conditions in the country of the currency, including such things as its political situation, its economy, and other related rumors. By the numbers, a country’s financial system depends on a number of confirmed measurements such as its Central Bank’s interest rate, tax policy, the national unemployment level and the rate of inflation. A trader can also predict that less confirmed occurrences, such as transition or political unrest will also have an effect on the market. Before basing all forecasts on the issues alone, however, it is significant to remember that traders must also consider the expectations and anticipations of market participants. For just as in any supply market, the value of a currency is also based in big part on insights of and anticipations about that currency, not only on its reality.

Trade Forex and make money

Forex trading is one of the most potentially rewarding kinds of investments offered. As surely the risk is huge, the ability to perform marginal trading on forex means that possible profits are huge relative to actual capital funds. Another advantage of forex is that its size avoids almost all attempts by others to manipulate the market for their own gain. So that when trading in foreign currency markets one can feel pretty confident that the trade he or she is making has the same opportunity for profit as other traders all over the world. As trading in forex short term requires a definite degree of business, traders who make use of a technical analysis can feel pretty confident that their own ability to forecast the daily fluctuations of the currency market are sufficient to give them the knowledge required making informed trades.