The practice of currency exchange is growing as the world becomes one market. As mentioned in the introduction page, Forex is trading two currencies; example given was Yuan to Dollar. This is nearly always a two way transaction, although it is possible to have multiple players involved where a round of more than two currencies are exchanged in one multiple transaction.
One ‘bonus’ of the Forex is that there is no centralized point for the exchange. This means that worldwide trading is done, 24 hours a day, five days a week. Trading starts at 8 PM GMT, Sunday night, and goes until 10PM GMT, Friday night. There is no daily starting and stopping bell. People can, for all practical purposes, trade at will. In the past this was controlled by banks, but with the advent of the computer and the internet age that has changed. Currency is exchanged in all the world markets and the major financial centers in the United States, Asia, Europe and Australia. This gives a lot of freedom and leeway to those wishing to trade.
What is the attraction for currency exchange and why would you be interested in doing it? There are fluctuations in the value of any country’s currency. Many times on the news you will hear that the dollar is weak or strong, and what does that really mean to you as a consumer? If the dollar is weak in trading that means that goods produced in the United States can be purchased for less overseas, and that foreign goods will cost more dollars, when imported into the USA.
How does that impact the Forex? Well, not in a major way directly, but the softening of the dollar will cause it to trade for more of a given foreign currency. For example, if the dollar is trading for 7 Yuan, I can get 700 Yuan for my 100 dollars today. Next week if the dollar is trading at 6 Yaun, I can trade my 700 Yuan for $116.16. As a simple illustration, that brings home the possibilities. This does not take into account the cost for the exchange itself, as there are fees involved with any transaction.
In that example, there was a 16% gain in one week. On average well over a million dollars is exchanged on any given day, so you can do the math and consider the possibilities. (As I said, the example is overly simplified, just for illustration purposes. The normal fluctuation in a week is not normally 16%.)
Funds in the Forex are traded “over the counter” and are normally traded ‘on margin.’ This means that you can use the power of leverage to trade a great deal more money than you actually have access to. This is how some Forex traders have been able to make a great deal of money in a short period of time. However, trading on margin can also come back to bite you, if the exchange does not go as planned. As with any margin trading, you need to be able to cover the downside should the deal not go as expected.
As mentioned, earlier business in the Forex is conducted ‘over the counter’ also called spot trading, because the transactions happen immediately or ‘on the spot’. Each trade impacts later trades, because the value of any given currency stays ‘live’ 24 hours a day and depends on previous exchanges.
The Forex is not a place for amateurs to ‘play around’ in. There is a steep learning curve and if you go into the battle ground unprepared you will likely end up bleeding all your cash to cover your losses. Many factors enter into building the whole picture of the Forex. Local economic news, impacts of natural disasters and financial scandals all impact the value of a given currency and that in turn impacts how it is traded and who is currently left holding the bag. Getting educated is one way to learn, and in my opinion, the smart thing to do prior to starting down this path. You can’t learn everything out of a book or online, but at least it gives you a sampling of what you might encounter.