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A Forex Primer — Forex 101
By Kent Douglas
The Forex—or Foreign Exchange—market is the largest, most fluid investment vehicle the world has ever known. Nearly two trillion dollars are exchanged each day across a vast network of computers found in central banks, investment banks, hedge funds, and brokerage firms around the world. This is the most fluid market in the world because it operates 24 hours per day Sunday through Friday afternoon when it shuts down completely.
Around clock trading means that you rarely have problems with gaps (difference between what commodity closes at and what it opens at the following day—in stocks, the gap can sometimes be devastating), this never-ending array of profit-making opportunities can sometimes lead to over trading—a very costly mistake because it often defies the logic of most investment strategies and often leads to missed opportunities to maximize profit.
Traders in the operate in units known as “lots”. A lot is the equivalent of $100,000 (unless you opt for the “mini” lot) and you are essentially trying to predict how the exchange rate between two currencies will fluctuate in the future. While there are literally dozens of potential pairs, the six main players in the are:
· U.S. Dollar
· Euro
· Swiss Franc
· Japanese Yen
· Canada Dollar
· British Pound
International corporations and nations must exchange currency to help finance payroll, secure resources, pay vendors, support infrastructure, etc. This constant exchange of money is done based on a rate that fluctuates due to a variety of factors, including:
· Psychology—fear, greed, and other emotions play a large role in the markets and can sway rates dramatically; however, human emotions have always influenced the markets making them predictable based upon enough data and proper analysis.
· Current Events—with a 24-hour news cycle, events from around the globe can quickly influence exchange rates and cause substantial price fluctuations. If investors allow fear (emotion) to affect their decision-making,
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then a “sell-off” panic can set in and artificially deflate exchange rates. However, the “sell-off” and panic may have been predicted if caused by historically relevant factors that triggered a similar trend in the past. Doing your homework is a good way to judge if current events are truly relevant to the true exchange rate before deciding to sell.
· Government Reports—Many analysts gauge the economy and the way exchange rates are trending by a number of reports released by the government on a periodic basis by a variety of agencies. GDP, the prime rate, unemployment figures, consumer confidence, and many other reports have been known to play temporary roles in the exchange rates between nations.
Many investors in use margin to secure lots and you can typically secure 1-$100,000 lot for as little as $1,000. It is not very likely in this day and age of advanced technology and rapid connections for you to lose more than your investment—the account will typically be shut down automatically when it becomes negative but be sure to check with your broker. Small fluctuations in the market can make a big difference for those that are highly leveraged so it is best to ask very carefully about the potential risks when thinking about this option.
While there is no central exchange for traders to congregate, the market remains a great place to seek opportunity and profit. However, be sure to research any investment carefully—especially for hidden costs. Brokers are not paid a traditional commission—they are actually paid the difference between the bid and ask price on orders so make certain that all decisions are made only after careful research. Article by Kent Douglas, author of "The Simple Solution: The Easiest Currency Trading System Anywhere." To learn how you too can succeed in and Currency Trading, please visit www.SimpleForexSolution.com
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