The conversion of one country's currency into that of another is known as Foreign Exchange. The word ‘Forex or FX’ is an acronym of Foreign Exchange.
Method of Forex trading:
Choose a currency pair.
Set trade interval for which you think your currency ratio will increase.
Buy and wait till the end of your trade period.
Collect your amount with profit, or loss.
The foreign exchange market (also known FX, forex, or currency market) is an internationally decentralized, over-the-counter monetary market for exchanging currencies of different countries.
Over-the-counter (OTC) trade, in this context means trading of financial objects such as bonds, stocks and currencies directly between two parties without using any centralized constructed facility such as a Stock Exchange.
All transactions are processed through computer networks linking traders across the world.
The forex market, whose main function is to sustain global investment and trade, by permitting users to swap one currency to another, determines the comparative values of different currencies.
Why are currencies exchanged?
The exchange of currencies is conducted to maintain business and foreign trade. For example, a British tourist in America can’t pay in Pounds to gamble or shop at The Las Vegas Strip, Nevada because it is not the locally accepted currency there. So he will have to exchange the Great Britain Pounds (GBPs) for the locally acceptable currency, in this case the US Dollars, at the forex market.
Currencies are also exchanged to earn income. Just like any other trading business, currency trading is also aimed at buying low and selling high to make profits.
The inevitable exchange of currencies has made the FX market one of the biggest and most liquid monetary sector in the world.
Types of currency markets
There are three different ways by which an individual or corporation can trade foreign currency:
Spot market is where buying and selling of currencies is done according to the existing value. That value is determined by demand and supply. It depends on various aspects including economic results, current interest rates, influence of political and high-profile business situations as well as the anticipation of the upcoming fluctuations of different currencies against each other.
Forwards market is a place for buying and selling contracts over-the-counter between two trading parties. The terms of the agreement are decided jointly by the parties themselves.
Futures market is a place for buying and selling future contracts supported by a standard size and agreement date on public product markets like the Chicago Mercantile Exchange.
The spot market has always been the biggest marketplace as it is the "fundamental" asset which holds the roots of forward and futures forex market.
How Does Forex Trading Work?
Forex or currency trading is usually done through a market owner or broker; online or offline. A person trading currencies is dubbed ‘forex trader’ or ‘forex barter’ in their professional dialect.
You can place a trade order with a broker online at any point of time and the broker will fill your position with its partner in the interbank market. After you close your trade, your account will be credit (with profit or loss, of course) and your position will be closed.
Some popular forex trading web services includes Hot Forex, Trading Point and Delta Stock AD.
As a currency trader, you are free to choose any pair, any number of pairs, of the currency you expect to fluctuate in price after a desired time interval. After selecting your pair, you can place a trade amount accordingly.
A step by step example describing the forex trading method
Suppose you purchase 1000 Euros today for $1200 USD (USD/Euro= 1.2). How does it feel? Good huh!
You choose a one year span for your trade, i.e. your trade will end after 365 days. Be patient and keep your fingers crossed.
Throughout the year, whether the USD/Euro value increase or decrease, it makes no difference to your assigned trade. Cool.
After one year, when your trade matures, suppose the USD/Euro value goes worth 1.3. This means, 1,000 Euros may value around $1,300 USD. You would have a $100 profit.
How does it feel now? Excited? Don’t jump into the fray for you need to know a bit more.
Know the answers to these crucial questions before you ump on the bandwagon:
What if the value of USD/Euro went below your expectations, say around 1.0?
In that case, you will lose $200.
This type of a loss is very common in any investment business, and also digestible to an extent. As the market is based on political, economical, social and various other fluctuations happening throughout the world, losses are bound to happen.
This loss can be minimized by proper financial planning, setting short-term trades, accessing the present and future market conditions through guidance taken from market experts and researchers, etc.
What if I place a trade with a forex broker, market or company having nothing to do with the word ‘trade’?
There are these scam brokers and markets that entice your attention by advertising fancy ‘high yield’ forex systems, and once you place a trade with them, its curtains for you. They will never even reply your e-mail, forget about your money.
So before investing, research well about the authenticity of the broker or forex system you’re planning to go with. Beware of scams, smell them, spot them and spot them from afar.
Take a look at these major warning bells to avoid falling prey to Forex swindlers.
Little or No Risk guarantees/Large profit guarantees
If you bump into a company that claims to have developed a risk-free forex trading system, just move the other way. Forex trading is a highly profitable yet highly volatile business. Even the best trading experts cannot predict how much profit they are going to grab any given day.
Firms making such unrealistic proclamations are really after your cash, as in business, there is no big a lie than a ‘risk-free’ forex system.
Signal selling websites
The signal selling websites provide you the investment forecasts, based on what? Nobody has a clue. This type of scam services springs up on internet every single day and you have to pay weekly or monthly fee to get there so called ‘golden words of predictions’.
They tell you where, when, how and how much to invest on trade. They are nothing but plain scams, as nobody has a magic eye to tell how the market is going to behave in near future.
These signal sellers even take money from scam forex companies to promote their services, i.e. to ram unsuspecting people into their jaws.
Phony/High Yield Investment Programs
HYIPs, my goodness! How often have I been fooled by them before I finally and wisely dumped them. These are fake forex websites offering a high return after a very short period of time. Though their popular return is 110% after 24 hours, some of them even promise to pay an unbelievable 4000% after 5 minutes, sounds like a gag.
They are never going to pay you back, and rest assured, 99% of those websites will be gone within a week. The rest will pay for a slightly longer time, but then again, those are even more dangerous as they entice their investors by paying for a few days before they ransack a huge amount.
They mostly use a similar HYIP script, a freebie download from any software site. Payment methods include alertpay, libertyreserve and perfectmoney.
Just shun them, and if you feel like trying: then go for those accepting PayPal payments, there’s hardly any such site because if they use PayPal, they have to stay long and paying for making any profit due to PayPal’s terms and transaction fees.
Remember, there is no software to estimate and predict the FX market for you. Tons of such dubious products are launched everyday claiming an exact prediction of market movement, they cost around $50-$500. However, they are not worth a penny, never buy them, please.
And as always, never spend what you can’t afford to lose
Best of luck