What Is Forex Trading?

Forex is not a new household cleaning product. Forex or FX is simply short for foreign exchange, but refers more specifically to currency trading.

This is exchanging dollars for pounds, or euros for yen and so on. It has one thing in common with a household cleaning product, though – if you are not careful you can get cleaned out in a hurry trading currencies.

The currency exchange markets are the largest, most volatile and among the most risky forms of trade in the world. Amounts exchanged are large, magnifying small price changes, and the total daily volume is in the range of two trillion dollars. Yes, that’s ‘trillion’… a two followed by twelve zeros!

There are dozens of markets, with the largest centered in New York, London and Tokyo. Although, ‘centered’ is slightly misleading, since there’s no physical exchange that trades currency – unlike the New York or London Stock Exchanges for equities (stocks).

Instead, the playground primarily of large institutions – international banks, insurance companies and governments via their central banks – currency exchange is carried out by phone and via computer networks, formerly all private or government but now including the Internet.

And that latter means of communication, along with changes in trading methods, is what makes possible the opportunity for the individual investor with less than a few million dollars to participate in the fast-paced, highly speculative game of trading one country’s money for another’s.

In order to play that game without getting immediately run over, the investor will need to learn some new terminology, do some research in new areas, find a broker who trades currency and stock up on some courage pills. Enormous sums are traded in forex and only commodities trading offers similar ease in feeling dumb and getting poor fast.

But losing money isn’t inevitable for the prepared investor.

An investor will need to become familiar with new phrases and quoting methods – pips, spreads, cable and the like. Calculations formerly carried out with ease will now need a little more thought. Everyone is used to their own currency and seeing a $10 stock go up by a dollar one immediately sees a 10% gain. Trading currencies requires a little more knowledge.

The prepared investor will need to expand the scope of his research. Finding out the likely future of a home-based business is complicated, but straight forward. Conditions in one or two sectors and a few economic indicators can be grasped without requiring a PhD in finance. Learning about the factors influencing the currencies of two or more countries is an order of magnitude more difficult.

And more interesting.

Fast pace, global scope, large liquidity and volume, and a dozen different ways to hedge your bets. Yeah, that sounds good. Gotta get some of that right away!