Understanding the Forex market

If you read about investing, you've seen the word Forex trading. Historical roots of the Forex currency trade from the days of the gold exchange, through the Bretton Woods Agreement. The Bretton Woods Agreement, established in 1944, fixed national currencies against the dollar, and set the dollar at a rate of USD 35 per ounce of gold.
The Forex market as we know it today was actually established in 1971.

Today, the Forex market handles about $1.9 trillion in transactions every day, and it runs 24 hours a day, five days a week. The most traded currencies are the U.S. dollar, the Euro, Japanese yen, British pound, Swiss franc and Australian dollar. . As recently as ten years ago, currency trading had high barriers to entry, so only large banking and institutional firms had access to the tools and systems required to play in the Forex trading game. The advent of internet technology is what made Forex trading grow considerably popular as well as accessible with various types of investors.

Forex market basics

Forex markets are the most liquid and accessible markets in the world. The Forex market is overwhelmingly dominated by international banks, government banks, investment banks, corporations, and hedge funds. Individual traders account for only about 2 percent of the market. Forex trading must always be considered high risk, but with good Forex risk management it is possible to generate some excellent returns on your investment.

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Forex is the simultaneous buying of one currency and selling of another as forex is traded in what is known as "cross pairs" for example GBP/USD or EUR/USD. Forex, also known as foreign exchange, has many advantages over stocks and futures for both day trading and swing trading. Forex is all about investing money in foreign currencies, just gain profit by selling at a higher price, the one you hold, just to buy another one at a lower price. You buy one currency and sell another one. The idea is to make a trade when you believe the currency you’re buying is going to go up in value compared to the one you’re selling. Then, if it turns out that your prediction was correct, you do another trade in the reverse direction. Sell the currency you originally bought and buying the one you sold and collect the profits.

For example, let’s say the market reports this: GBP/EUR 1.2200. That means the cost of buying one British pound is 1.22 Euros. If you believed that was going to change, and the Euro was going to become more valuable than the Pound, you might sell £100,000, buy 100,000 Euros, and then wait. Then let’s say a few weeks later, the exchange rate changed to this: EUR/GBP 1.3100. You can see the Euro is now worth 1.31 pounds, a profit of 0.11 per unit.

Summary

The Forex market is vast and daunting and mostly inhabited by giant organizations. Forex trading is a serious business and it is vitally important that you are properly educated and informed before committing your hard-earned money to the markets.
But it can be navigated by individuals who have studied the finer points and who want to take a risk on something potential profitable. And since the whole world uses money, the trading of currency is always going to be a major force in the financial world.


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