What Is Forex?

Forex is the term used for the foreign exchange market. Anywhere from 1 to 2 trillion dollars change hands each day on the Forex. This should be pretty impressive when one remembers that the NYSE only has $25 billion traded each day.

Forex is simply the trading of one currency for another. For example, you buy Japanese Yen or sell US Dollars. I'll clarify that you aren't actually carrying out the deal. It will be handled by a broker, just like a stock deal.

On that note, let's look at stocks for a minute to understand Forex. If you are buying shares you are investing some of your money into the chosen company. The investment was based on your idea that the company would be successful in the future so that your shares will be worth more in the long run. Forex runs on the same line of thought. You are investing your money into a country's currency with the belief that their economy will grow in strength and increase the value of their currency.

The one big difference is that there isn't one actual Forex market building. All of the trades are conducted on a virtual scale 24 hours a day, using a vast communication network linking trading centers across the world.

Forex trading isn't a new concept. Forex trades have been occurring since 1971, but it used to be the trading game for big companies and wealthy individuals with millions to invest. The market has changed though. Anyone with a computer hooked up to a decent Internet connection can start trading with just $100.

There are seven currencies that are particularly popular. These are the USD (US Dollar), the EUR (Euro), the GBP (British Pounds), the CHF (Swiss Francs), the JPY (Japanese Yen), the AUD (Australian Dollars), and the CAD (Canadian Dollars). If you want to trade in any currency you can go by a simple method to understand the symbol. The first two letters will identify the related country, while the last letter represents the name of the currency.

Example:

JPY: JP =Japan , Y = Yen
CAD: CA =Canada , D = Dollars

This wide range of trading means that a forex center is open somewhere. Night owls and early birds will be on equal ground since there is always a market for trading.

Advantages to Forex Trading

You will find that there are many benefits to forex trading as opposed to normal share trading.

1. You don't have to worry about a commission when trading. The dealers make their share through the spread on each trade. This spread usually acts as less than 1% of the total trade.

2. You have no time limits. The market is running all day five days a week. It opens on 0:00 AM GMT Monday and won't close until 10:00 PM GMT Friday.

3. There is little artificial influence within the market. The high trade volume ensures that most companies can't affect the market with standard trading practices. Only extreme measures, such as wide scale false promotion of a currency, can drive up prices.

4. It is possible to trade on the margin effectively in the Forex market. This practice allows you to use a base amount of money (anywhere from .5% to 4%) as collateral to exercise larger amounts of loaned capital. You can now leverage investments to your benefit. Most forex trading follows through a standard $100,000 lot. Smaller traders can use micro-lots and mini-lots though.