A Newbie's Introduction to the Currency Markets

By: Christopher Temple


The Forex market is used to trade one currency against another. The professionals refer to this as foreign exchange, more commonly referred to as Forex or FX trading. This is an international market covering the entire planet, and has no specific central exchange, unlike all the other financial market you can think of. It is also the biggest markets you can imagine, with almost 2 trillion dollars changing hands daily (that's an awful lot of zeros)).

Why do we need a Currency Exchange? Well, An international currency exchange is necessary in many situations:-

Consumers will come into contact with a currency exchange when they travel overseas. They go to the bank or their local currency exchange bureau to convert one currency (usually their own currency) into another (the currency of the country they intend to travel to) so they can buy goods or services in that country. Consumers often purchase goods in a foreign country or over the Internet using their credit cards. They will find that the amount they paid in the foreign currency will have been converted to their local currency by their credit card company, and will appear on their credit card statement. Although each such currency exchange is relatively small, the aggregation of all the millions of such transactions every day is very significant.

Businesses must convert currencies when they conduct business outside their own country. For example, if they export goods to another country and receive payment in that country's currency, the payment must be converted back to their own home currency. If they import goods or services, then businesses will often have to pay in a foreign currency, which requires them to first convert their local currency into a foreign currency. Big companies convert huge amounts of currency every year, often tens of billions of dollars. The timing of these transactions can have a huge effect on their balance sheet and overall profits.

Commercial and Investment Banks trade currencies to support their banking processes. They also use the currency markets for hedging and trading purposes.

Governments and central banks trade currencies in attempts to improve national trading conditions or in attempts to manipulate or adjust economic or financial imbalances. Although they do not trade for speculative reasons they are often very profitable, since they generally trade on a medium to long-term basis.

Investors and/or speculators (traders) require currency exchange whenever they trade a foreign investment, whether it is in equities, bonds, bank deposits, or real estate. If a Swiss investor buys shares in an American company on the NASDAQ exchange, he must pay for the shares in U.S. Dollars. He'll probably have to convert Swiss francs to U.S. Dollars to complete the deal. Similarly, an English real estate investor selling a New York property will need to convert the proceeds of the sale from U.S. Dollars to British Pounds.

Because the value of one currency continuously varies against the other currencies, investors and speculators can directly trade these currencies in order to profit from their movements. For example, if an English investor forms the opinion that the Japanese economy is strengthening and expects the Yen to appreciate in value (i.e., go up relative to other currencies including the pound), then he may want to buy Japanese Yen, taking what is referred to as a long position (expecting a rise). Similarly, if an American investor believes that the Euro is about to go down, he may sell the Euro to take a short position (expecting a decrease in value). Importantly, investors and speculators can profit whether currencies becoming stronger (by taking a long position) or become weaker (by taking a short position).

Many speculators are day traders, meaning that they set out to take advantage of market movements over very short time periods, often buying a currency and then selling it again very soon after (sometimes in just seconds).

Until a few years ago this market was very difficult if not impossible to enter for the individual, because of the huge investment and very expensive facilities needed. The market was exclusively the preserve of the big banks and other huge institutions.

There has been an enormous explosion in interest in trading the Forex markets over the last three or four years, as single individuals have discovered that they can now set up and compete on equal terms with the huge trading corporations. Individuals working from home, using a desktop pc and an internet connection can purchase and download the training and expertise they need, together with the trading software and forex data feeds also required, and the be off and running - often making more money than they could ever have managed if they had been working for one of those huge corporations referred to earlier (and keeping all of it too).

Traders are attracted to currency trading for many reasons, including:-

The volatility of the market, which gives them regular opportunities to earn money.

The enormous liquidity of the markets. Unlike most other markets, there is just so much money in the system at any one time that it is hard to imagine a situation where you could not trade.

The markets are open 24 hours a day. 24 hours per day from Monday to Friday, the market is active and money can be made.

Currencies can now be traded with no brokerage charges. Nowadays an account with a spread trader can be set up and funded in seconds, and the only charge is the spread or difference between the buying and selling price, which can be as low as 2 pips (pip is the smallest unit traded, and you can often trade as low as one or two dollars per pip)

Very low entry costs. A newcomer can enter the market for as little as the cost of a PC, some training books, videos and software, probably one or more trading systems to get him started, and a datafeed to provide instant currency prices (good free ones are available too). Probably less than a thousand bucks for a genuine business that (if you are successful) can produce an extremely good lifestyle.

Even lower overhead costs. No staff, no offices, no expensive commuting (unless you want to). Costs are limited to broadband running costs, a little electricity, and lots of coffee.

Tax-free profits. In my country at least (Britain) I pay no tax on my trading income. With tax at 40% on earned income here, this means that instead of pocketing just 60 bucks out of every 100 bucks earned, I keep the lot. And this equates to around 66% extra income (60 x 1.66 = 100). Now that's some incentive!

So if you are thinking of trading as a way of earning an online income, I say, come on in, the water's lovely. And if you are thinking that maybe you aren't cut out for this sort of thing - no math qualifications, no talent with numbers, I say rubbish!

It will cost you very little to find out whether you are cut out for the trading lifestyle or not, certainly far less than getting into internet marketing or setting up an offline business only to find you don't like it or can't cope. You could pleasantly surprise yourself!

Some of the very best traders I know are really average, self-taught folk who didn't think for a single moment that they could handle forex trading. Oh, and many of them are women!

This is the first of a short series of articles aimed at introducing newcomers to internet-based forex trading. The follow-on articles will be launched at regular intervals. This and the follow-on articles (and lots of others too) can be found at my web site (links in the final paragraph)

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Christopher Temple is a successful trader who writes often on Forex Currency Trading Systems in his search to help newbies Learning Forex Trading Online. Try the links to learn about his book.
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