What is Forex Trading

Introduction to Forex Trading

Foreign Exchange (Forex) refers to the exchange of currency of a country other than one’s own where buyers and sellers conduct foreign exchange transactions. Several currencies are in circulation – the US Dollar, the pound Sterling of the UK, the Euro (which is the common currency for block of 15+ European countries), and the Dinar etc.
The strength of a country’s currency is determined by factors like:

  • Convertibility
  • Purchasing power
  • Overall economic performance of country
  • GDP
  • Attractiveness as an investment tool

What is Forex Trading?

Keeping all these factors in mind, Forex trading is buying and selling of currencies of other countries. The exchange rate between currencies changes everyday. Traders watch these figures and opt to buy the Euro when it is weaker and sell the Dollar when it is stronger. This is called going long on the USD/Euro.

Why do Forex Trading?

Foreign exchange is very important for several reasons.

  • Investment: Several currencies like Euro and the US Dollar are freely convertible currencies and make a good investment.
  • Trade Payments: These currencies are well known and accepted in all countries as payment in exchange for goods and services.
  • Reserves: Every country buys foreign exchange to hold as reserves to pay for major items like petroleum, chemicals etc. In such cases, it makes perfect sense to buy when a currency is a bit lower in price. This is also an indicator of how well a country’s economy is doing.

How Forex Trading Works

Forex trading can be done through a licensed broker. Let’s assume that you are dealing with the US Dollar and the Euro. This is called a currency pair. If you purchase 1000 euros on November 2007 it would have probably cost you 1100 dollars, at the end of November 2009 the Euro worth 1400 dollars. If you chose to trade at this time, you would have had a $300 net gain.

Forex trades have a set of minimum amount. Your broker can tell you what it is for each currency. You can then place an order with the broker and it is passed on to a person in the Interbank market to fill. When the trade is closed, the position at the Interbank market is also closed and the difference – loss or gain – automatically will be credited to your account. This is a very quick process.

Where Can One Find Forex Trading Information?

There are several resources to find information. Financial newspapers and magazines publish indepth reports on how currencies are doing on a daily, weekly and monthly basis. TV programs also offer the same information in a more immediate manner. Several websites have also been set up to offer people interested in trading, a platform to do so. They offer indepth information and coaching online to help people participate in the market and make money doing it.