Forex Basics: An introduction

By: Yudi Hariyanto

The Foreign Exchange Market or known as FOREX is a world wide market for buying and selling currencies. Forex (currency Exchange) in the simple term is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

Forex market handles a huge volume of transactions 24 hours a day, 5 days a week. Daily exchanges are worth approximately $1.5 trillion (US dollars). In comparison, the United States Treasury Bond market averages $300 billion a day and American stock markets exchange about $100 billion a day.

There are two reasons to buy and sell currencies.

1. about 5% of daily turnover and governments that buy or sell product and services in a foreign country or must convert profit that made in foreign currencies into their domestic currencies.

2. The other 95% is trading for profit, or speculation.

The potential for profit exists because there is always movement between currencies. Even small changes can result in substantial profits because of the large amount of money involved in forex market. At the same time, it can be a relatively safe market for the individual investor. There are safeguards built in to protect both the broker and the investor and a number of software tools exist to minimize loss.

The FOREX is made up of about 5000 trading institutions such as international banks, central government banks (such as the US Federal Reserve), and commercial companies and brokers for all types of foreign currency exchange. There is no centralized location of FOREX – major trading centers are located in New York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt, and all trading is by telephone or over the Internet. Businesses use the market to buy and sell products in other countries, but most of the activity on the FOREX is from currency traders who use it to generate profits from small movements in the market.

Even though there are many huge players in FOREX, it is accessible to the small investor - thanks to recent changes in the regulations. Previously, there was a minimum transaction size and traders were required to meet strict financial requirements. With the advent of Internet trading, regulations have been changed to allow large inter-bank units to be broken down into smaller lots. Each lot is worth about $100,000 and is accessible to the individual investor through 'leverage' – loans extended for trading. Typically, lots can be controlled with a leverage of 100:1 meaning that US$1,000 will allow you to control a $100,000 currency exchange.

Forex trading is a really A true 24-hour market. Forex begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York.

Some advantages trading in FOREX.

· Investment in forex market is very liquid because of its size (very big volume). International banks are continuously providing bid and ask offers. The high number of transactions each day means there is always a buyer or a seller for any currency.

· The market is open 24 hours a day, 5 days a week and can be accessed anywhere. Trades can be done on the Internet from your home or office.

· It is an Open Market. Currency fluctuations are usually caused by changes in national economies. News about these changes is accessible to everyone at the same time – there can be no 'insider trading' in FOREX.

Brokers do not take commissions from their trade (commission free). They earn money by setting a 'spread' – the difference between what a currency can be bought at and what it can be sold at.