The World of FOREX Currency Trading
FOREX or foreign exchange currency trading is the act of trading one currency against another in order to gain a profit in the difference between the two. Also known as 'arbitrage trading', the idea is to make a profit on one currency due to its gain of decline against another.Currency trading is similar to trading in commodities, except that it is much more liquid than trading in metals (except precious metal like gold) or in energy commodities like oil.
The most common form of FOREX trading is cross trading in which two currencies, like the US Dollar and the Euro or the Japanese Yen are traded against each other. If one is involved in trading the Dollar against the Euro, and the Euro is rising against the Dollar, the idea is to make a profit on the drop of the weaker currency, in this case the Dollar.
In contrast to stock options and the like, currencies are traded on what is known as the Interbank Market. There are usually two types of trading: either 'spot' trading in which short term profits are desired (usually in the space of only one or two trading periods) or long term contract trading, which can be anywhere from 30 to 180 days.
The profits desired depend on the "spread" or difference between the bidding and selling prices of the currencies traded. For this reason, many professional currencies traders are involved in short term, highly speculative trading, where a small difference in the "spread" can make them a considerable amount of money on very large trading transactions.
Most FOREX trading is con on 'margins' in which the trader is actually putting up a small percentage of the total amount being traded (usually 10%). By trading on margin, a person can be involved in large sum of money and make much more profits. By trading on a leverage basis, the amount being traded can be up to 100 times the amount on deposit.
The currency trader tries to anticipate either rising or falling currency markets, which will influence him on when to sell a sell a falling currency at one price and then buy it back later at a much lower price, realizing a profit on the "spread".
Since currency trading is very volatile, it is a good idea to become knowledgeable in the basics of international currency markets as well as seek competent trading advice.
Search Forex Committee
