Forex Investments: How Forex Works
Anybody interested in making forex investments needs to know a little about the forex market and how it works.
Forex is short for foreign exchange, and the most common way of making money from this market is to engage in forex or currency trading. This is a little like stock trading, but with some important differences.
First, instead of dealing in stocks through the national stock exchange, forex traders deal internationally by exchanging one currency for another. They wait for the price to change, which with luck and/or good analysis will be a change in their favor, and then they exchange the currency back to close out the trade with a profit.
Second, forex investments are unlikely to be held for the long term, by which we mean more than a few months at the most. Currency prices are relative to one another, so they do not boom and bust in quite the same way as stocks.
It is possible that an investor might identify a country in the developing world that was likely to do well in the long term and invest in that country’s currency for several years. However, most players in the forex market are not doing this. They are identifying short to medium term trends in the prices of currency pairs (say, the US dollar against the euro) and buying (going long) or selling (going short) the pair in the hope of making money quickly. Day trading is common, and a trade that is held over several weeks would be considered a long term trade in the forex market.
The forex market, unlike the stock market, is open 24 hours a day in the business week. This again is because of its international nature. It is always business hours somewhere in the world, except on weekends and holidays. This means that forex traders can operate at just about any time of day or night, according to what suits their schedule and their trading system. Some traders work business hours in their own time zone, others log on in the evenings or early mornings before heading off for a day job.
Speculative trading is risky, whether it is undertaken in stocks or currency. If you are looking for a safe investment then forex trading is not for you. Risk is the trade off for the opportunity of making large profits from the high leverage that is available through forex brokers. Controlling a position size that is 100 times your committed funds is common; 200 times is not unusual and 400 times is possible with some brokers. This means that a small change in the price of a selected currency pair can have a big impact.
It is possible to buy software that will trade for you according to a pre set system. These programs are known as forex robots or automated forex trading systems. They vary in quality and it is important to invest in a good one. They take a little time to set up but once installed, they are ‘set and forget’. One advantage of forex trading is that most brokers offer a demonstration mode for their account management systems, so you can test your robot safely in demo before allowing it to trade with real money.
Whether you use an automated system or a manual forex trading system, thorough testing is worth all the time that it takes. Anything that reduces the risk involved in forex investments is worth doing, to protect your funds and maximize your profits.
