24/7 Online Foreign Currency Trading

Why Trade in Forex Markets?

So you want to get into foreign exchange ("forex") trading? This is understandable since forex is the biggest action on earth, bar none. In mid-2006, International Financial Services, London (IFSL) estimated that daily turnover in just the major trading centers - London, New York, Tokyo and Singapore - averaged some U.S.$2.9 trillion. By comparison, turnover in stock markets around the globe amount to less than a tenth. And the 62 casinos in Las Vegas and Macau combined had a gross take of less than $14 billion in 2006. Here is how you can get in on the action.

Where do you go to participate? Well, first of all, there is no bricks-and-mortar central exchange like the London Stock Exchange, the New York Stock Exchange or the Chicago Board of Trade (for commodities). The forex market is widely dispersed through thousands of storefront money changers (the "over-the-counter" or OTC market) and banks trading with each other.

Most of the world's leading currencies are valued relative to each other, to the U.S. dollar, to be more specific. It is no wonder then that exchange rates and where they are headed attract so much attention from heads of governments, central banks, importers and exporters. Every newspaper business page contains a forex bulletin each weekday and entire TV broadcasts are devoted to the standing of major currencies.

The investment and speculative opportunities for buying one currency or selling another occur because virtually every currency follows a "floating rate", not fixed, regimen. That is, on any given day, hour or minute, exchange rates are determined by supply and demand. Market psychology, economic factors and political developments influence exchange rates one way or the other.

So where does one go to participate in the forex market? At the simplest level, one can "buy" a favored currency from a money changer or bank, take "physical delivery", store it in a strongbox at home or in a foreign currency deposit account, then sit back and wait for it to rise in value versus another currency over a period of weeks or months.

One could leave management of a more varied currency basket, to trade reactively or speculatively to the traditional channels: investment and commercial banks, money portfolio managers, and money brokers. Then your account will have to compete with those of corporations and wealthy individuals for proper attention.

If one had known in the third quarter of 2006, for example, that the Philippine government would announce highly positive economic fundamentals and a record-setting invisibles inflow by Christmas, going short on the U.S. dollar-Phil peso rate would have ridden a full 10% appreciation by New Year's Day 2007. And if one had speculated that mixed news on the economic front would hurt the U.S. dollar, buying $1 million worth of euros on April 3, 2007 would have earned a profit of close to $30,000 by month's end or an annualized return of about 25%.

Holding on to a favored mix of currencies over a period of time takes steel nerves, however, because numerous market sentiment, political and economic factors introduce great volatility in forex rates. In the interbank market, traders "take positions on" (buy and sell) a given currency pair like the dollar and the euro dozens, even hundreds of times a day.

For now, you have learned that the forex market represents awesome trading potential. Like the stock market, currency markets let you profit on both good and bad news. Fortunately, there are various institutions that can help you open and manage an account.