Forex trading
The investor's goal
in Forex trading is
to profit from
foreign currency
movements. Forex
trading or currency
trading is always
done in currency
pairs. For example,
the exchange rate of
EUR/USD on Aug 26th,
2003 was 1.0857.
This number is also
referred to as a "Forex
rate" or just "rate"
for short. If the
investor had bought
1000 euros on that
date, he would have
paid 1085.70 U.S.
dollars. One year
later, the Forex
rate was 1.2083,
which means that the
value of the euro
(the numerator of
the EUR/USD ratio)
increased in
relation to the U.S.
dollar. The investor
could now sell the
1000 euros in order
to receive 1208.30
dollars. Therefore,
the investor would
have USD 122.60 more
than what he had
started one year
earlier. However, to
know if the investor
made a good
investment, one
needs to compare
this investment
option to
alternative
investments. At the
very minimum, the
return on investment
(ROI) should be
compared to the
return on a
"risk-free"
investment. One
example of a
risk-free investment
is long-term U.S.
government bonds
since there is
practically no
chance for a
default, i.e. the
U.S. government
going bankrupt or
being unable or
unwilling to pay its
debt obligation.
When trading
currencies, trade
only when you expect
the currency you are
buying to increase
in value relative to
the currency you are
selling. If the
currency you are
buying does increase
in value, you must
sell back the other
currency in order to
lock in a profit. An
open trade (also
called an open
position) is a trade
in which a trader
has bought or sold a
particular currency
pair and has not yet
sold or bought back
the equivalent
amount to close the
position.
However, it is
estimated that
anywhere from
70%-90% of the FX
market is
speculative. In
other words, the
person or
institution that
bought or sold the
currency has no plan
to actually take
delivery of the
currency in the end;
rather, they were
solely speculating
on the movement of
that particular
currency. |
An
overview of the Forex market