Jargon can be very confusing and very frustrating to many people. I am often asked: What is forex trading ?… what does ‘forex’ stand for?
When I tell them ‘forex’, or even FX is simply a short term for ‘foreign exchange’ representing the exchange of one countries money e.g. the dollar for another countries money e.g. the euro their faces light up with understanding and they usually smile.
Many people already have some experience of exchanging currencies when they are going to another country for business or on vacation. You probably realize as well that the banks are constantly changing money for businesses who import or export goods from foreign countries.
However, an estimated 70%-90% of currency transactions are speculative. This means that the person or institution making the exchange has no intention of taking delivery of the currency that they have ordered, but plans to trade it back at a profit. This is forex or currency trading.
Most world currencies no longer have a fixed exchange rate, so their values or prices are constantly fluctuating. When a country is experiencing an economic boom is currency value will generally be strong, or high. When a country has an economic crisis or downturn, its currency will usually fall too.
Since small changes in values are happening every minute to every currency, there is a lot of potential for financial traders to make money by buying a currency whose price is rising in exchange for one whose price is falling.
Unlike with stocks, 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 denoted by three letters and the major pairs 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 investment. You have to act on rising and falling trends or economic and financial news to decide when to buy and sell.
You then close the trade by exchanging the opposite way and if the market has moved far enough in the direction you expected, you will come out with a profit.
Until recent years 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 much smaller investors can enter the markets via their home computer.
You need a broker and there are many who cater to the smaller trader by offering mini forex trading accounts so that you can start up with just a few hundred dollars. A larger starting fund 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.
Fortunately most brokers offer free forex demo accounts where you can learn your trading skills by practicing in demonstration mode before you ever risk a real cent.
You can use leverage to control larger sums of money than you have in your account. This means that theoretically you can make a lot of money in a short time, and this is a very attractive prospect for a growing number of people.
Keep in mind that money can be lost very fast too. Solid training, experience with a demo account and a good system are some of the qualities that you will need to cultivate if you want to explore what is forex trading for real.