What is Forex?

You may have noticed that the value of currencies goes up and down every day. What most people don't realize is that there is a foreign exchange market - or "Forex" for short - where you can potentially profit from the movement of these currencies. The best known example is George Soros who made a billion dollars in a day by trading currencies. Be aware, however, that currency trading involves significant risk and individuals can lose a substantial part of their investment. As technologies have improved, the Forex market has become more accessible resulting in an unprecedented growth in online trading. One of the great things about trading currencies now is that you no longer have to be a big money manager to trade this market; traders and investors like you and I can trade this market.

The Forex market is the largest financial market on Earth. Its average daily trading volume is more than $3.2 trillion. Compare that with the New York Stock Exchange, which only has an average daily trading volume of $55 billion. In fact, if you were to put ALL of the world's equity and futures markets together, their combined trading volume would only equal a QUARTER of the Forex market. Why is size important? Because there are so many buyers and sellers that transaction prices are kept low. If you're wondering how trading the Forex market is different then trading stocks, here are a few major benefits.

Many firms don't charge commissions – you pay only the bid/ask spreads. There's 24 hour trading – you dictate when to trade and how to trade. You can trade on leverage, but this can magnify potential gains AND losses. You can focus on picking from a few currencies rather then from 5000 stocks. Forex is accessible – you don't need a lot of money to get started.

How is Forex traded?

The mechanics of a trade are virtually identical to those in other markets. The only difference is that you're buying one currency and selling another at the same time. That's why currencies are quoted in pairs, like EUR/USD or USD/JPY. The exchange rate represents the purchase price between the two currencies.

Example: the EUR/USD rate represents the number of USD one EUR can buy. If you think the Euro will increase in value against the US Dollar, you buy Euros with US Dollars. If the exchange rate rises, you sell the Euros back, and you cash in your profit. Please keep in mind that forex trading involves a high risk of loss.

If you want to trade Forex

If you're interested in Forex trading, we recommend FXCM. They have over 500 professionals on hand to help you out 24-7. They offer a lot of FREE information to get you started, access to services with an array of technical and fundamental analysis tools, and for less then twenty dollars, you can learn trading skills from professional instructors through the FX Power Course. Plus, if you just want to mess around and simply test your trading skills without a serious commitment, you can open a Free Demo Account with absolutely no risk.

Important: be aware of the risks Finally, it cannot be stressed enough that trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, we recommend that you seek advice from an independent financial advisor.

How Forex Works

The currency exchange rate is the rate at which one currency can be exchanged for another. It is always quoted in pairs like the EUR/USD (the Euro and the US Dollar). Exchange rates fluctuate based on economic factors like inflation, industrial production and geopolitical events. These factors will influence whether you buy or sell a currency pair.

Example of a Forex Trade:

The EUR/USD rate represents the number of US Dollars one Euro can purchase. If you believe that the Euro will increase in value against the US Dollar, you will buy Euros with US Dollars. If the exchange rate rises, you will sell the Euros back, making a profit. Please keep in mind that forex trading involves a high risk of loss.

Why Trade Currencies?

Forex is the world's largest market. With about 3.2 trillion US dollars in daily volume and 24-hour market action, we believe it is a true "step above" the equities market for the serious trader. Some key differences are:

Many firms don't charge commissions – you pay only the bid/ask spreads. There's 24 hour trading – you dictate when to trade and how to trade. You can trade on leverage, but this can magnify potential gains and losses. You can focus on picking from a few currencies rather then from 5000 stocks. Forex is accessible – you don’t need a lot of money to get started.

RISK DISCLOSURE:
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.