A very useful site
for learning about Forex Trading can be found at
http://www.babypips.com/
For ease of use I
have also included below a useful article found on
Yahoo. The article is sourced from
http://au.biz.yahoo.com/forex-education/what-is-forex-trading.html
.
An overview of the Forex market
The Forex market is a non-stop cash market where
currencies of nations are traded, typically via
brokers. Foreign currencies are constantly and
simultaneously bought and sold across local and
global markets and traders' investments increase or
decrease in value based upon currency movements.
Foreign exchange market conditions can change at any
time in response to real-time events.
The main enticements of currency dealing to private
investors and attractions for short-term Forex
trading are:
* 24-hour trading, 5 days a week with non-stop
access to global Forex dealers.
* An enormous liquid market making it easy to trade
most currencies.
* Volatile markets offering profit opportunities.
* Standard instruments for controlling risk
exposure.
* The ability to profit in rising or falling
markets.
* Leveraged trading with low margin requirements.
* Many options for zero commission trading.
Forex trading
The investor's goal
in Forex trading is to profit from foreign currency
movements. Forex trading or currency trading is
always done in currency pairs. For example, the
exchange rate of EUR/USD on Aug 26th, 2003 was
1.0857. This number is also referred to as a "Forex
rate" or just "rate" for short. If the investor had
bought 1000 euros on that date, he would have paid
1085.70 U.S. dollars. One year later, the Forex rate
was 1.2083, which means that the value of the euro
(the numerator of the EUR/USD ratio) increased in
relation to the U.S. dollar. The investor could now
sell the 1000 euros in order to receive 1208.30
dollars. Therefore, the investor would have USD
122.60 more than what he had started one year
earlier. However, to know if the investor made a
good investment, one needs to compare this
investment option to alternative investments. At the
very minimum, the return on investment (ROI) should
be compared to the return on a "risk-free"
investment. One example of a risk-free investment is
long-term U.S. government bonds since there is
practically no chance for a default, i.e. the U.S.
government going bankrupt or being unable or
unwilling to pay its debt obligation.
When trading currencies, trade only when you expect
the currency you are buying to increase in value
relative to the currency you are selling. If the
currency you are buying does increase in value, you
must sell back the other currency in order to lock
in a profit. An open trade (also called an open
position) is a trade in which a trader has bought or
sold a particular currency pair and has not yet sold
or bought back the equivalent amount to close the
position.
However, it is estimated that anywhere from 70%-90%
of the FX market is speculative. In other words, the
person or institution that bought or sold the
currency has no plan to actually take delivery of
the currency in the end; rather, they were solely
speculating on the movement of that particular
currency.
