Forex Overview


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Forex Overview

  1. 1. Each day, millions of trades are made in a currency exchange market called Forex. The word"Forex" directly stems off of the beginning of two words - "foreign" and "exchange". Unlike othertrading systems such as the stock market, Forex does not involve the trading of any goods,physical or representative. Instead, Forex operates through buying, selling, and trading betweenthe currencies of various economies from around the world. Because the Forex market is truly aglobal trading system, trades are made 24 hours a day, five days a week. In addition, Forex is notbound by any one control agency, which means that Forex is the only true free market economictrading system available today. By leaving the exchange rates out of any one groups hands, it ismuch more difficult to even attempt to manipulate or corner the currency market. With all of theadvantages associated with the Forex system, and the global range of participation, the Forexmarket is the largest market in the entire world. Anywhere between 1 trillion and 1.5 trillionequivalent United States dollars are traded on the Forex market each and every day.Forex operates mainly on the concept of "free-floating" currencies; this can be explained best ascurrencies that are not backed by specific materials such as gold or silver. Prior to 1971, a marketsuch as Forex would not work because of the international "Bretton Woods" agreement. Thisagreement stipulated that all involved economies would strive to hold the value of their currenciesclose to the value of the US dollar, which in turn was held to the value of gold. In 1971, the BrettonWoods agreement was abandoned. The United States had run a huge deficit during the VietnamConflict, and began printing out more paper currency than they could back with gold, resulting in arelatively high level of inflation. By 1976, every major currency worldwide had left the systemestablished under the Bretton Woods agreement, and had changed into a free-floating system ofcurrency. This free-floating system meant that each countrys currency could have vastly differentvalues that fluctuated based on how the countrys economy was faring at that time.Because each currency fluctuates independently, it is possible to make a profit from the changesin currency value. For example, 1 Euro used to be worth about 0.86 US dollars. Shortly thereafter,1 Euro was worth about 1.08 US dollars. Those who bought Euros at 86 cents and sold them at1.08 US dollars were able to make 22 cents profit off of each Euro - this could equate to hundredsof millions in profits for those who were deeply rooted in the Euro. Everything in the Forex marketis hanging on the exchange rate of various currencies. Sadly, very few people realize that theexchange rates they see on the news and read about in the newspapers each day could possiblybe able to work towards profits on their behalf, even if they were just to make a small investment.The Euro and the US dollar are probably the two most well-known currencies that are used in theForex market, and therefore they are two of the most widely traded in the Forex market. In additionto the two "kings of currency", there are a few other currencies that have fairly strong reputation forForex trading. The Australian Dollar, the Japanese Yen, the Canadian Dollar, and the NewZealand Dollar are all staple currencies used by established Forex traders. However, it isimportant to note that on most Forex services, you wont see the full name of a currency writtenout. Each currency has its own symbol, just as companies involved in the stock market have theirown symbol based off of the name of their company. Some of the important currency symbols toknow are:USD - United States DollarEUR - The Euro
  2. 2. CAD - The Canadian DollarAUD - The Australian DollarJPY - The Japanese YenNZD - The New Zealand DollarAlthough the symbols may be confusing at first, youll get used to them after a while. Rememberthat each currencys symbol is logically formed from the name of the currency, usually in someform of acronym. With a little practice, youll be able to determine most currency codes withouteven having to look them up.Some of the richest people in the world have Forex as a large part of their investment portfolio.Warren Buffet, the worlds richest man, has over $20 Billion invested in various currencies on theForex market. His revenue portfolio usually includes well over one-hundred million dollars in profitfrom Forex trades each quartile. George Soros is another big name in the field of currency trading- it is believed that he made over $1 billion in profit from a single day of trading in 1992! Althoughthose types of trades are very rare, he was still able to amass over $7 Billion from three decadesof trading on the Forex market. The strategy of George Soros also goes to show that you donthave to be too risky to make profits on Forex - his conservative strategy involves withdrawing largeportions of his profits from the market, even when the trend of his various investments seems tostill be correlating upward.Thankfully, you dont have to invest millions of dollars to make a profit on Forex. Many peoplehave recorded their success with initial investments of anywhere from $10,000 to as little as $100for an initial investment. This wide range of economic requirements makes Forex an attractivevenue for trading among all classes, from those well entrenched in the lower rungs of the middleclass, all the way up to the richest people alive on the planet. For those on the lower end of thespectrum, access to the Forex market is a fairly recent innovation. Within the past decades,various companies began offering a system that is friendlier to the average person, allowing thesmaller initial investments and greater flexibility that is seen in the market today. Now, no matterwhat economic position you are in, you can get started. Although its possible to jump right in andstart investing, its best that you make sure you have a better understanding of the ins and outs ofForex trading before you get started.The world of Forex is one that can be both profitable and exciting, but in order to make Forex workfor you it is important that you know how the system works. Like most lucrative activities, tobecome a Forex pro you need a lot of practice. There are many websites that offer exactly this, thesimulated practice of Foreign Exchange.The services provided by online practice sites differ from site to site, so it is always a good idea tomake sure you know all of the details of the site you are about to use. For example, there areseveral online brokers who will offer a practice account for a period of several weeks, thenterminate it and start you on a live account, which means you may end up using your own moneybefore you are ready to. Its always a good idea to find a site that offers an unlimited practiceaccount. Having a practice account allows you to learn the ways of the trade with no risk at all.
  3. 3. Continuing to use the practice account while you use a live account is also a beneficial tool foreven the most seasoned Forex traders. The use of a no risk practice account enables you to tryout new trading strategies and tread into unknown waters. If the strategy works, you know that youcan now implement that strategy into your real account. If the strategy fails, you know to refrainfrom the use of that strategy without the loss of any actual money.Of course, simply using a no risk account wont get you anywhere. In order to make money withForex, you need to put your own money in. Obviously, it would be ridiculous to travel to othercountries to purchase and sell different currencies, so there are many websites that you can use todigitally trade your money. Almost all online brokerage systems have different features to offer youso you have to do the research to find out which site you wish to create an account with.All brokers will require specific information of you to create your account. The information they willneed from you includes information required to communicate with you, including your name,mailing address, telephone number, e-mail address. They also require information needed toidentify who you are, including your Social Security number, Passport number or Tax Identificationnumber. It is required by law that they have this information, so they can prevent fraudulenttrading. They may also collect various personal information when you open an account, includinggender, birth date, occupation, and employment status.Now that you have practiced trading currency and set up your live account, it is time to truly enterthis profitable yet risky world. To make money with Forex, you do need to have money to beginwith. It is possible to trade with very small amounts of money, but this will also lead to very smallprofits. As is with many other exchange systems, high payouts will only come with high risks. Youcant expect to start getting millions as soon as you put money in to the market, but you cantexpect to make any money at all if you dont put in at least a 3-digit value.As most Forex brokers will warn you, you can loose money in the foreign exchange market, sodont put your life savings into any one trade. Always trade with money that youd be able tosurvive without. This will ensure that if you get a bad trade and loose a lot of money, you wont endup on the streets, and youll be able to make a comeback in the future.So how does trading currency work? Logically, trades always come in pairs. For example, acommon trade would be the United States Dollar to the Japanese Yen. This is expressed asUSD/JPY. The way to quote a trade is kind of tricky, but with practice it becomes as natural asreading your native language. In a Forex quote, the first currency in the list (IE: USD in USD/JPY)is the base currency, and in the quote the base is always one. This means if (hypothetically ofcourse) One USD was worth Two JPY, that the quote would be expressed as 1/2.When trading in Forex, we use pips. Pip is an acronym for "percentage in point". A pip a certaindecimal place in a number compared to the same decimal place in another number. Using pips,we track the gains and losses of a currencies value compared to anothers. Lets take a look at anexample. Say a value is written as 1.0001/1.0004. This would indicate a 3-pip spread, because ofthe 3 number difference in the fourth decimal place. Almost all currency pairs go to the fourthdecimal place. The only currency pair that doesnt is that of the USD/JPY, and it goes to thesecond decimal place. For example, a USD/JPY quote with a 3-point spread would look like this:1.01/1.04.A very common aspect to the foreign exchange is leverage. Leverage trading, also known as
  4. 4. trading on margin, is a way to amplify the amount of money you are making. When you useleverage trading, you borrow a certain amount of money from your broker and use that to makeyour transaction. This allows you to trade with more money then you are actually spending,meaning you can make higher profits than you would normally be able to make.There are risks associated with leverage trading. If you increase the amount of money you areusing, if a trade goes bad, then youll loose more money than youd usually loose. The risks areworth it though, because a big win on margin means a huge payout. As mentioned before, it isdefinitely a wise idea to try out leverage trading on your practice account before you use itexcessively on your live account, so you can get a feel for the way it works.Now that youre an expert on the way Forex trading works there are some things about foreignexchange that you should know. Forex is just like the stock market in that there are many benefitsand risks, but if you are going to invest your time and personal money into this system, you shouldbe fully aware of all of the factors that may change your decision to invest in the currency market.Generally speaking, Forex is a difficult subject to opinionate on, because of the different factorsthat may alter the currency over the years. "Supply and demand" is a major issue affecting theForex organization, because the world is in constant variable to change, one significant productbeing oil. Usually the currency of all the nations around the globe is described as a huge "meltingpot", because of the fact that all of the interchanging controversy, political affairs, nationaldisputes, and possibly war conflicts, all mixed together as a whole, altering the nature of Forexevery second! Although problems such as supply and demand, and the whole "melting pot" issue,there are a numerous amount of pros to Forex; one being benefited profit from long term stock.Because of the positive aspects of Forex, the percentage of the use of electronic trading in the FXmarket (shortened from Foreign Exchange) increased by 7% from 2005 to 2008. Despite thecontroversial realm of Forex, it is still recognized today by many, and is still popular amongst manyof the nations in the world.Of all the organizations that recognize Forex, most of them practice fiscal policy, and monetarypolicy. Both policies are dependent on the nations outlook on economics, and their standards set.The governments budget deficits, or surpluses against the country, is widely affected by thecountrys economic status of trade, and may critically inflict the nations currency. Another factorfor the nations deficit spending is what the nation already has, in terms of necessities for thecitizens, and the society. The more the country already has, prior to trade, the greater the budgetfor other demands from the people, such as technology, innovations in existing products, etc.Although a country may have an abundance in necessities, greed may hinder the nationseconomic status, by changing government officials wants, to want "unnecessary" products,therefore ruining or "wasting" the countrys money. This negative trend may lead to the countrysdoom, and hurt the Forexs reputation for positive change. There are some countries which holdmore of a product (such as oil stated above), the Middle East dominating that sector in the circle oftrade; Since the Middle East suffers much poverty, as a result of deficit spending, and lack of otherresources, they demand for a higher price in oil, to maintain their economic status. This process isknown as the "flights to quality", and is practiced by many countries, wanting to survive in thetrading network that exists today. Interest rate, and leveraged financing, is due to the inflations thatoccur in many parts of the world from one point to another. Inflations wear down purchasingabilities, causing the currency to fall with it. In some cases, a country may observe the trends thatit takes, and beforehand, take action to avoid any mishaps that had been experienced before.
  5. 5. Sometimes, the country will buy more of a product, or sell more of a product, otherwise known as"overbought" or "oversold". This may aid in the countrys future, or devastatingly hurt the country,because of lack of thought, as a result of fraud logic."What started out as a market for professionals is now attracting traders from all over the worldand of all experience levels" is part of a letter of the chairman of Forex, and it is completely true.There is even a 30-day trial for Forex online at ifanyone interested in Forex wants to learn more about the company. Although affected byleveraged financing, interest rate, and causing an increase or decrease in exchange rate risks,Forex can be a great way for quick profits and integrated economy for the country. In investing instocks that are most likely to be successful for a long period of time, and researching thesecompanies for more reference and background that you need to know, Forex can aid in thesefields. In the Forex market of different levels of access, the inter-bank market composed of thelargest investment bank firm, which contains "spreads", which are divided into bid, and ask prices.Large amounts of transactions, with large amounts traded, and requesting a small amount ofdifference is known as a better spread, which is preferred by many investors.In comparison to the Stock Market, the Forex organization is just as stable, and safe, if the userson it are aware, and decently knowledgeable about the topic. The Stock Market Crash in 1929 wasa result of lack of thinking, because of the extremely cheap shares, replacing the shares originallycosting thousands of dollars. When the Stock Market crashed, and the New Deal was proposed byFranklin D. Roosevelt, leveraged finance was present, and utilized to stabilize the economy at thetime. The United States was extremely wealthy and prosperous in the 20s (prior to thedepression), and had not realized what could happen as a result of carelessness in spending. Thisis a result of deficit spending, and how it could damage a society, in less than a decade! Whenjoining Forex, keep in mind that with the possible positive outcomes, and negative ones, there areobstacles that must be faced to become successful.As a result of many catastrophic events, such as the Great Depression that occurred in the UnitedStates, people investing in the Forex organization keep in mind of the dangers, and rewards thatmay come upon them in a certain point in time. With more work and consideration outputted by aperson, or organization in the Forex program will there be more signs of prosperity as a result. Inrelation to individuals such as Warren Buffet and George Soros, they have become successfulthrough experience, and determination through many programs, and research, for securitypurposes. Reserving some of the most riches people in the world, to others that are just testdriving it to discover its potential for them, Forex is a broad topic that experiences different peopleeveryday. Forex may not help everyone that invests in it, but if enough outputted effort is amplifiedin attempts to better the economy, it is most definitely something that any person shouldexperience first-hand.
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