A simple definition of Forex or Foreign Currency Exchange Rates is; exchanging the currency of one country, into the currency of another country, and hopefully making some money at the same time as doing this. Tourists do this all the time, for example for the 2010 FIFA World Cup, tourists arriving in South Africa with Dollars or GBP made a killing with an exchange rate which was respectively approximately 7 – 1 for the dollar and 11 – 1 for the GBP.
For example if you were going to travel to the UK from the US and you know you need to change dollars into pounds. You don’t really know how much you need, so while in still the US still you purchase $1000 worth of the pound. This gets you £636.588 at that days exchange rate. A week later when you arrive in the UK, you realise this will not be sufficient money for your stay and you purchase pounds with dollars again, but this time you get less pounds, or if you are lucky, you get more. This is because of fluctuations in exchange rates and this is a massive money making market for people who would like to get into forex trading.
At one point in time, only banks or other financial institutions were allowed to trade in Forex. This is now an open market industry and it is a great way to make money online, but you have to understand what foreign currency exchange rates are and how to manipulate the market to your advantage.
Let’s assume you are again going to the UK and you need to purchase foreign currency in dollars again, so you watch the exchange rate this time and wait for it to be in your favour. Then you buy $2000 worth of the GBP and get more for your money. However this does not really work to your favour all the time if you are travelling.
Today, we can sit behind our PC and make use of our knowledge of this market and the information provided to us by foreign currency exchange rate software or brokers and make money by buying and selling forex at the right time. The timing in this industry is everything and software has been designed to help us work with forex as and when it changes, so we can buy and sell to our advantage.
There are a few main currencies which are used in the most part and these are the strongest currencies wprld-wide, which include the GB£, Euro, and AU$ – the only currencies stronger than the US$, and a lot of trading takes place between these four currencies coupled.
Theoretically there is a difference between the customer purchasing Forex in a bank, as banks tag on commissions and others costs. Whereas a foreign currency exchange rate trader will be able to purchase their forex at a cheaper rate; the concept however remains the same.
The difference in the price of what forex is bought for and what it is sold for is called “Spread” and it is in this spread that money is made by traders. We will discuss this in more detail at a later stage. Right now, the only thing you need to understand is what Foreign Currency Exchange Rates actually are.
Forex Guide – What Are the Risks?
“Risk” sound so risky doesn’t it, but making money anywhere involves risk. Even if you are trading your skills as a toilet cleaner, you trade your labor for cash and there is a risk involved as you are paid after the job is done. Forex trading carries a lot more risk than cleaning toilets for pay. If you don’t get paid for the job you have done, you have recourse with a labor organization, or simply take the law into your own hands and break the non-payers legs.
With forex trading, some of the risk lies in the fact that it is constantly in flux, this happens 24 hours a day, 6 days a week. As much as the market moves for your predictions when you place a trade, it will also move against what you expect to happen before you close out and this type of risk involves loss with no recourse.
For this reason forex brokers allow traders to place a trade and use leverage, this means holding a large position with a relatively small amount of money, the smaller the amount of money for the trader, the lesser the risk . In this way if the trade is unfavorable, the risk, as well as the loss is kept to a minimum. Because of the small amounts or tics in which forex moves, even a small loss of position, could mean a large loss in terms of investment value and this is also the reason why the business can be so profitable. You must remember that with risk, comes reward.
Losses depend to a large degree on the agreement you have with the broker you use. It is highly recommended that you do not go with a forex broker who tells you that your investment is protected. This simply is not the case with this type of trading environment. There is no guarantees and there is no such thing as insured forex contracts, even FDIC-insured bank accounts are probably not protected if a dealer goes bankrupt. There is no investment protection or segregation of funds, so beware of brokers who make false promises; these will turn out to be false.
The forex trading market is not like a regulated futures exchange, it fluctuates hugely, there is no central trading office like there is with a stock exchange, it is off-exchange and the execution price is decided by the dealer. An online forex trader has to rely on the broker to offer him a fair price. System failures happen online and these are all risks the forex trader must face.
The internet is a hotbed for people to scam other people out of their hard earned money, but it also provides some unbelievably good opportunities. Due diligence is vital if you are going to be investing in the foreign exchange market. Do your homework and behave like a business person if this is going to be your business. Due diligence and protecting your self against fraud will ensure you are subject to less risk.
Generally speaking any program which promises you can get rich quick, with no hard work involved will be a scam. It takes hard work and guts to get started in any business, so you can weed out blatant offers like this straight away. There has been in increase in forex scams, so avoid becoming a victim. Learning to read the signs of a scam will help. If it is too good to be true, it generally will be – untrue, that is!