WHAT IS FOREX? And, SHOULD I BE TRADING IT??

[Joe Ross]

I am constantly being asked, WHAT IS FOREX? And, SHOULD I BE TRADING IT??

Many people may have heard of Forex but are uncertain as to what it is and how it works. Simply stated, the word Forex is an acronym composed of the two words foreign exchange.

Forex is the world's largest financial market, with an estimated daily average of well over $1 TRILLION, and is based on the floating exchange rate system of international currencies. That means Forex trading is based on the value of one currency as traded against another. Almost any two currencies can be paired and traded in Forex but some common pairs you might see are: Euro/USDollar, British Pound/USDollar, Japanese Yen/Euro, British Pound/Euro, etc.

The Forex market has no one physical location or central exchange. It is not a true exchange in the way you might think it is, and price discovery is not a true factor.

Forex trading takes place in the world’s great financial centers such as New York, London, and Tokyo. The market is characterized by high liquidity and twenty-four hour activity and is of interest for active traders. But keep in mind one thing, because Forex is not an exchange in the true sense of the word, no one really knows the price of one currency vs another. The currencies can be trading at different prices in different parts of the world. The price you will see, is the price your broker will allow you to see. The broker is the one taking the other side of your trade. You are trading against the house, in other words, Forex brokers are running bucket shops.

The primary market for currencies is the 24-hour Interbank market. The Interbank market literally follows the path of the sun across the heavens, moving from east to west. The largest part of Forex trading takes place among several hundred large international banks that carry out international currency transactions for both governments and large international companies. The banks provide a continuous exchange rate for each other and for the overall market. This primary market for international currency trading is the 24-hour Interbank market. Forex trading is multimedia in nature and takes place both over the internet via computers and the more traditional telephone. Consequently, all a Forex broker needs to operate is a computer and internet access. Beware of this. If you are bound and determined to trade in the Forex, you’d better know a lot about your broker. Most of them are entirely unregulated in any way.

A Forex trader can live anywhere in the world as long as he has access to the internet. Consequently, the Forex trader can work anywhere he has a computer, even at home, same as futures or stock traders.

The Forex trader can also choose his own work hours since the market is open 24-hours a day. All the advantages notwithstanding, not everyone wants to trade Forex on his own. Individuals that want to invest in the FX market but prefer to have their funds managed by professionals can attain the services of an institutional investor to trade on their behalf. This is called a managed account. For such individuals, they would, in my opinion, be wise to forget about Forex entirely.

If you want to trade through a bank’s Forex facilities, you should really check out the substance behind that bank. It is easy enough to set up a bank in Naroo for about $15,000. Don’t be impressed by the bank’s name either. Check it out thoroughly. A decent bank’s Forex Investment trading utilizes spot foreign exchange that provides the flexibility needed in almost any investment situation. Through foreign exchange trading the investor is not just limited to buying, selling or staying out of the market. Instead, it is possible to tailor positions to adapt to market conditions and outlook, thus benefiting from an asset's price raise or fall without incurring the cost of buying or selling the asset. By monitoring and trading the top currencies around the world, this enables the investor to participate in a diverse selection of international markets.

In the pursuit of short to medium term enhanced growth whilst limiting risk, trading is adjusted on a daily basis in response to market variations and news, thus minimizing its exposure to sudden fluctuations. Trading is suitable for investors seeking a short to medium term enhanced growth investment.

A tailored portfolio of financial instruments can also be structured and weighted to suit an investor's time horizon, risk limitations, and investment objectives. In other words, you can hedge currency prices in the Forex. The truth is that is the first and best use of the Forex. The people who belong there are companies doing business in foreign countries who need to hedge the price of their goods and services.

Joe Ross