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This is a guest blog post from Tom Cleveland, a market analyst for ForexTraders.
It is quite difficult today to avoid on the Internet or on national television, for that matter, an advertisement touting the wonderful qualities of forex trading. The popularity garnered by currency trading over the past decade has been truly amazing, considering the high risk involved and the acknowledged propensity for early failure by beginners. However, for the curious minded that only wants to understand what all the commotion is about, the Internet and books at the local bookstore make the activity out to be highly complex and nearly requiring a doctorate degree to comprehend.
For those newcomers that would prefer a few simple answers to a few direct questions, here are the basics:
1 . What is forex? The foreign exchange market, or “forex” for short, is actually the largest and most liquid market on the planet with daily volume turnover exceeding $4 trillion. It is not a market where we are accustomed to seeing shouting traders on the floor of some exchange. No “bell” is rung to begin or end the daily cycle as on Wall Street. Large global banks moving money between themselves, the so-called “InterBank” market, constitute over 50% of the volume. Forex brokers then contract with one or several banks in order to provide access to other market participants, who include other banks, financial institutions, hedge funds, and individual investors involved in retail forex trading.
2. How do people make money with Forex? As with any investment activity, you make money by buying low and selling high. However, in forex trading, you are not buying a share in a company. You are buying a “currency pair”, and then hoping that your position appreciates, or depreciates if you are “shorting”. Currencies reflect global economic fundamentals, and with so much volume and so many participants reacting to every new bit of information released daily, there is volatility in all currency pair valuations. These fluctuations enable trading to take place. Forex trading is about speculation, not about buying and holding for the long-term.
3. Can I do it on my own or do I need a broker? You need a broker to gain access. He will typically provide a software trading platform that you can use to study the market, practice trading with “virtual” cash and real time quotes, and execute actual trade orders. His compensation is usually a “spread” between the “Bid” and “Ask” prices quoted.
4. What are some of the things to be aware of? The forex market opens in New Zealand in the morning, and then moves with the Sun to Tokyo, London, and eventually New York, on each and every business day. Access can then be available “24X7” in most cases. The “EUR/USD” pair, the Euro and the Dollar, is the heaviest traded pair, and beginners are advised to focus their early efforts here.
5. Is it considered risky? Yes, the risk profile is considered very high, meaning that specialized training and months of practice trading are required to merely survive. Guidance by a mentor is highly recommended.
6. Why don’t more people do it? Many people try, but their impatience and lack of experience get the best of them, resulting in early failures in the first few months. Active trading requires a disciplined approach and the ability to block one’s emotions from interfering in plan-driven decision making.
Flexibility, convenience, and the lack of market manipulation are the attractions. If you have a laptop, tablet, or advanced cell phone, together with Internet access, you can trade currencies in your bedroom or down the street at your local Starbucks. Knowledge, experience, and emotional control are key factors for success. Impatience and inexperience are primary reasons for early failure. Be sure to prepare adequately if you have any interest in going forward.
About the Author
Tom Cleveland has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. Tom served as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer. Tom is now a market analyst for Forex Traders which is an online resource for the foreign exchange market.
Tom, thanks for providing this helpful intro to forex for our readers. I have yet to invest in the forex markets, and I am not sure I will anytime soon. I would want to be able to do lots of research and have lots of time to watch the markets. I encourage anyone who wants to get into the forex market to get well educated and move slowly.