The term FOREX, which is an acronym for Foreign Exchange, refers to
an international exchange market where currencies are bought and
sold. The contemporary market began in the 1970’s with the
introduction of floating currencies and free exchange rates, where
supply and demand strictly determine the price of one currency
against another.
The FOREX market is unique for a number of reasons. It is, for
instance, virtually free of any external controls, making it almost
impossible for anyone to manipulate it. It is also the largest
liquid financial market, with trading reaching nearly 2 trillion US
dollars daily. With this volume of money moving frequently, it’s not
difficult to understand why any single investor could significantly
affect the price of any major currency. And because of its
liquidity, positions in the market can be opened and closed
extremely quickly.
Some investors participate in the FOREX market for long-term hedge
positions, while others utilize marginal trading to try to obtain
large short-term gains. The combination of small but generally
constant daily fluctuations in currency prices creates an attractive
environment for a wide range of investors with differing investment
strategies.
There is no central FOREX exchange which handles all trading.
Transactions take place all over the world via telecommunications.
Trading is conducted twenty-four hours a day, from Monday 00:00 GMT
to Friday at 10:00 pm GMT. (This equates to late Sunday afternoon
through Friday afternoon in the U.S.) FOREX dealers operate
literally around the globe, quoting the exchange rates of all major
currencies. Investors can purchase currencies through these dealers.
It’s a common practice for investors to speculate on currency prices
by obtaining a credit line (which is available with as little as
$500), thus vastly increasing their potential for gains, as well as
losses. This is called marginal trading.
Marginal trading simply means trading with borrowed capital. It has
its appeal in the fact that FOREX investments can be made without a
huge supply of capital. This allows traders to invest much more
money, establishing bigger positions in the market, with much
smaller amounts of actual money. This makes FOREX trading very easy
to enter into for the new investor.
Marginal trading in an exchange market is quantified in lots. The
term lot designates approximately $100,000. This amount can
potentially be obtained with as little as one-half of one percent
down, or $500. Here’s an example: You believe that signals in the
market indicate that the British Pound will go up against the US
Dollar. You open 1 lot for buying the Pound with a 1 percent margin
at the price of 1.49889, and then you wait for the exchange rate to
climb. At some point in the future, your predictions prove accurate;
the exchange rate climbs, and you decide to sell. You close the
position at 1.5050, thus earning 61 pips, or about $405. So, on an
initial capital investment of $1,000 you realized over 40% in
profits. When you close a position, the deposit that you originally
made is returned to you and a calculation of your profits or losses
is performed. This profit or loss is then credited to or debited
from your account.
Technical Analysis and Fundamental Analysis.
