A Beginner’s Guide to FOREX

by Mary McDowski

FOREX is the abbreviation for the Foreign Exchange market. FOREX is basically an international exchange market where currencies from all over the world are bought and sold with the purpose of speculating or hedging on currency price fluctuations.

The market today began in the 1970’s. FOREX is a very unique market because it is not based in any particular place, and it also has very few qualifications for investing. FOREX is also free of external controls, and the investors (participants in the market) largely determine how much a currency is worth based on demand. Almost anyone can invest in FOREX, and there are strategies for investors who want to have long-term gains, and strategies for investors who desire short-term gains. The vast array of investors makes FOREX quite unique in the financial community.

The Workings of FOREX

FOREX is not centered at one place like the NYSE. The specific hours for FOREX trade are 24 hours a day from Sunday afternoon to Friday afternoon. FOREX transactions can take place at almost any time, anywhere, all over the world. There are FOREX dealers in almost all of the time zones, and it is simple to find them. Many dealers can be found online. All an investor does is decide what currency he or she wants to purchase, contact the dealer, and then makes the purchase. Most FOREX trading is conducted on margin.  This is called marginal trading.

What is Marginal Trading?

Marginal trading is a term used for trading with borrowed capital. FOREX investments can be made without actually having the money. All an investor needs to do is borrow the money for a certain currency. The investor wants to choose a currency that will increase in value quite rapidly. Once the currency increases, the investor pays back the money he or she borrowed and makes sheer profit. This is a high-risk investment, but the rewards are great (as with most high risk investments).

In marginal trading, a smaller amount of money, the margin, may be leveraged or multiplied to control a larger position.  For example, if leverage is 100:1, then a trade using $1,000 of margin controls a position $100,000 in size.  Traders should be aware that marginal trading and the use of leverage magnifies both potential gains and losses.

Two Types of FOREX Analytics

FOREX traders often have to analyze the market. Like all investments, FOREX involves a certain amount of calculated risk. Two ways to calculate these risks are though Technical Analysis and Fundamental Analysis.

Technical Analysis is based on the idea that trends through history will continue. A FOREX investor will notice that a certain currency is very strong and seems to be rising at a normal rate. The same investor will also suppose that the currency will not decline in value, and will continue to rise, as it has done in the past. The investor then purchases a large amount of that currency and expects to make a profit. This investment entails a large assumption and may entail a substantial risk of loss..

Fundamental Analysis is an analysis of an entire countries situation. Investors utilizing this technique look at the situation of the country in which the currency finds its base. Factors such as the countries economic status, political status, and global status are taken into account. For example, a Fundamental Analysis investor would not invest in currency from a country that just overthrew its leader and is in political shambles. Although this investment seems logical, it does not take into account one of the fundamental elements of FOREX trading. FOREX currency values are largely determined by the investors. That being said, Fundamental Analysis assumes that other FOREX traders will view a countries situation in the same way and respond accordingly.

Benefits of FOREX

FOREX can be suited to the financial objectives of a variety of people.  FOREX trading can gain (or lose) investors a large amount of money either over a long period of time, or in a short period of time.  Investors who choose to invest in FOREX should be well informed about the market and understand the current situations in many countries of the world.  FOREX trading is an exciting investment tool, and worth investigating by informed investors.

About the Author

Mary McDowski enjoys writing about various investments and strategies. Ms. McDowski believes that there is great potential in FOREX investments.