Foreign Currency TradingBy JONAH of Cashvally.com
The forex (short for foreign exchange) market is one of the largest independently
governed markets in the world. No single country has a say in the way the forex market works and
every day billions of dollars change hands in the forex market. Forex trading is possible 24 hours
a day, 7 days a week, 365 days a year, and unlike the stock exchange the forex market does not
close or open for trading. Interestingly, forex trading is based purely on trust; there are no
clearing houses or guarantors involved.
A forex trader is forced to keep his word not because he
is bound by any legal contract but because he has a reputation to keep. Arbitration committees
have been set up in most countries and forex traders accept decisions of the committee if any
disputes arise. However, a trader is in no way legally bound to accept the arbitration committee's
decision.
In the US, arbitration of forex trading is carried out by the National Futures Association or the
NFA. Contrary to popular belief, a forex trader does not make money via commission on each
transaction, the forex trader makes money on the difference between buy and sell value. In essence,
a trader makes money by facilitating the transaction since the buy and sell rates are regulated by
the government. This is why the forex traders are called traders and not brokers, as they are not
brokers in the traditional sense of the word (brokers earn money by asking for a brokerage fee).
To better understand the concept of forex trading lets take an example, lets assume a forex trader
buys 10,000 at an exchange rate of $1.5 per euro. This means the forex trader has invested $15,000
in the forex market. A trained investor will keep his eye on the market, and when he receives a
favourable exchange rate he will probably sell the 10,000 at an exchange rate of $1.8 per euro.
The $15,000 investment has now translated into $18,000, a profit of $3,000. However, there is no
way for the forex trader to know for sure if the euro will strengthen compared to the dollar and
he can also incur a loss of $2,000 if the exchange rate goes down to $1.3 per euro.
Forex trading is a high risk market, but unlike the stock exchange the price of a particular
foreign exchange rarely drops overnight. However, there can be fluctuations which can result in
profit or loss. In the example above, the euro/dollar exchange rate can exhibit the fluctuations
mentioned in a single day; this means a forex trader has to be alert and keep an eye out for
fluctuations in the market.
Unlike the stock exchange, no single person can influence the forex
market. No matter how large an investment a forex trader makes, it will never be enough to impact
the exchange rate. The stability of the forex market has made it a favourable investing ground,
and it is now possible for people to make smaller investments and make money from forex trading.
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