Most people don't realize that the foreign exchange trading markets are far larger than the stock markets in terms of the amount of money involved. Formerly the province of whe world's largest banks and banking companies, foreign exchange trading is now open to individual investors.
If you are contemplating entering into foreign exchange trading (also known as forex and FX trading), you would be wise to become aware of in how trading is done in the forex markets. No matter if you are an individual trader or an international bank, the reason for trading is always the same: to earn as much revenue as possible in as short a time as possible.
Unlike individual stock markets which are located each in its own country, the overall forex market is global in size and far bigger in terms of the amounts of money involved. The fundamental idea behind all forex trading is to buy and sell currency pairs in the hope that the value of that pair will become higher in order that it can be sold at a profit. An example of a currency pair would be the US dollar against the Euro (USD/EUR). The opposite pair would be the Euro against the US dollar (EUR/USD). These pairs will always move in opposite directions: If the USD/EUR pair is rising in value, then the EUR/USD pair will be falling in value. In this way, the Forex market is similar to the stock market: The goal of investing in either market is to buy low and then sell high.
The central banks control the money supply and interest rates around the world. They are located in London, New York and Tokyo. These locations are where most forex trading occurs. Greater than half of all forex trading involves banks, large and small, with the largest banks doing most of the trading. Most forex trading is done between banks and is known as "interbank" trading. At the conclusion of each business day, any bank has large amounts of money that will not be required by its customers until the next business day. During this “overnight” period, many banks customarily engage in forex trading with this money in hopes of having more money in the morning than they did at the end of business the night before. If they are successful in doing this, they will have more money to lend the following day.
Events such as the recent Japanese tsunami and earthquake will cause currencies to abruptly fall and rise with respect to each other. As one currency declines, another will rise. For instance, if the US dollar is “weak” this means that another currency will be “strong” and vice versa.
In recent years, single investors (also referred to in the forex markets as “spectators”) have found out that they can make money in forex trading just as the biggest banks do. The difference is apparent in the relative size of the investments they make. For an individual to become involved, he or she will be required to do business with a FX broker who will make the trades on their behalf in exchange for a commission.
As a single person, there are 2 ways to participate: Make all the trading decisions by yourself (very risky for novices) or choose to follow the trading patterns of a professional, successful trader you have decided to trust. If this is your choice, then it is essential that the trading signals you are being presented with are the same as the trades actually being made by the professional who is giving you the signals. This is very often not the case, so take care. The old saying, “Put your money where your mouth is” is meaningful in this situation.
Finally, be advised that private investors, just like the banks and commercial companies, can face huge losses and make huge profits suddenly. For this reason, forex investing is neither for the unaware nor the faint-hearted.
Bob Gillespie
© 2011 Robert M. Gillespie, Jr.
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