The Forex or foreign exchange market is a worldwide electronic platform used to trade currencies. When a person is Forex trading, he or she is actually buying and selling options to trade currencies electronically on this market.
Such currency trading is not investment instead it is speculation. When a person speculates he or she hopes to make an immediate or short term profit off the transaction. When a person invests, he or she intends to increase the amount of funds over a long term basis. A Forex trader is trying to make money quickly by buying selling currency options.
Currency Trading Basics
Currency traders try to make money by taking advantage of the differences between the values of nation's currencies. If the British pound is worth two US dollars, the currency trader buys pounds and converts them into dollars.
Historically such trading was done by professionals operating out of banks or exchanges. They often handled currency conversion for large companies and governments operating in other nations. The Forex is actually a network of banks and other financial institutions that got link currency exchanges around the world.
Modern computer technology and trading accounts offered by brokerages allows anybody to make such trades. Persons who are trading purchase contracts to buy and sell currency. They will not actually take possession of the funds. Instead the entire transaction takes place electronically.
Market Timing
Most Forex trades involve some sort of market timing in which speculators try to figure out when they can make the most money selling their contracts. Many traders now use completely automated computer programs called trading robots for this purpose. The program is designed to execute a strategy that the trader believes will him the most money.
Many speculators will spend a lot of time developing market strategies. They often run computer simulations to test these strategies before implementing them.
Drawbacks to Forex Trading
There are many drawbacks to Forex trading that potential traders should be aware. The first is the cost, the brokerages that offer such trading to the public make their money by charging for each trade. Brokerages encourage Forex speculation because it is very profitable for them. Many traders end up spending more on transaction fees than they make from trading.
The cost of Forex trading can also be very high because most traders speculate on the margin. The brokerage gives the speculator a margin account with a line of credit. The trader uses the credit to purchase contracts and hopes to use the proceeds of the trading to pay off the debts incurred.
The problem with this practice is that most traders end up using their funds to cover their margins sooner or later. That is why most Forex traders never make any money. If their trading strategies fail they find themselves on the hook for all funds they lost through margin trading.
Not a Good Investment Option
Forex trading is not a good investment option for the average person. Like day trading it is a form of speculation in which most participants will loose all of their money. Persons interested in foreign currency trading should investigate safer alternatives such as exchange traded funds that invest in foreign currency trading.
Such currency trading is not investment instead it is speculation. When a person speculates he or she hopes to make an immediate or short term profit off the transaction. When a person invests, he or she intends to increase the amount of funds over a long term basis. A Forex trader is trying to make money quickly by buying selling currency options.
Currency Trading Basics
Currency traders try to make money by taking advantage of the differences between the values of nation's currencies. If the British pound is worth two US dollars, the currency trader buys pounds and converts them into dollars.
Historically such trading was done by professionals operating out of banks or exchanges. They often handled currency conversion for large companies and governments operating in other nations. The Forex is actually a network of banks and other financial institutions that got link currency exchanges around the world.
Modern computer technology and trading accounts offered by brokerages allows anybody to make such trades. Persons who are trading purchase contracts to buy and sell currency. They will not actually take possession of the funds. Instead the entire transaction takes place electronically.
Market Timing
Most Forex trades involve some sort of market timing in which speculators try to figure out when they can make the most money selling their contracts. Many traders now use completely automated computer programs called trading robots for this purpose. The program is designed to execute a strategy that the trader believes will him the most money.
Many speculators will spend a lot of time developing market strategies. They often run computer simulations to test these strategies before implementing them.
Drawbacks to Forex Trading
There are many drawbacks to Forex trading that potential traders should be aware. The first is the cost, the brokerages that offer such trading to the public make their money by charging for each trade. Brokerages encourage Forex speculation because it is very profitable for them. Many traders end up spending more on transaction fees than they make from trading.
The cost of Forex trading can also be very high because most traders speculate on the margin. The brokerage gives the speculator a margin account with a line of credit. The trader uses the credit to purchase contracts and hopes to use the proceeds of the trading to pay off the debts incurred.
The problem with this practice is that most traders end up using their funds to cover their margins sooner or later. That is why most Forex traders never make any money. If their trading strategies fail they find themselves on the hook for all funds they lost through margin trading.
Not a Good Investment Option
Forex trading is not a good investment option for the average person. Like day trading it is a form of speculation in which most participants will loose all of their money. Persons interested in foreign currency trading should investigate safer alternatives such as exchange traded funds that invest in foreign currency trading.
Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Calculator, Annuity Interest Rates, and Annuities Good or Bad.
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