finance

What in the world is this FOREX thing?

I have heard Forex be mentioned quite a bit recently and how you can make good money by investing in it. I’ve just thought it was some type of special stock or bonds trading and havent put a second thought into it because the people suggesting it are the same type of people hawking get rich quick schemes. But this saturday I was walking by the Biology building at my university and I noticed signs saying FOREX Meeting, so I was going to go in and sit in for a second to see what Forex is all about but I couldn’t go in because of a security guard and me not being a member of their “Forex traders club”. Needless to say this peaked my interest and I decided to give Forex a serious looking into.

What is Forex?

Forex is simply an abbreviation of “Foreign Exchange Market” and is simply the market for exchanging currency’s. Unlike stocks though there is no central exchange, instead all exchanges are done over the counter through brokers and dealers. In simplistic terms, Forex is me giving you x amount of usd in exchange for an agreed upon equivalent in whatever currency you have.

How do You make money off of Forex?

You make or lose money by trading in the Forex market by taking advantage of the fact that the values of currencies are dependent on the percieved economic strength of the country that prints that currency. So while 1 usd(US dollar) may get you 1 euro one day, if the United States economy drops or Europes economy increases, you may only be able to purchase half euro for each usd the next day. So you would make money by trading a strong currency for a weak currency that you believe wil become stronger at a later date.

Heres an example, (keep in mind this is a fabrication to help you learn)

• Year 1:You buy 1 million Iraqi Dinars for 10 US dollars.
• Year 2:Event happens like US takes over Iraq(1millionID/usd, hold cause you only lose money if you sell)
• Year 3:US establishes a stable government(500kID/usd, hold cause 50 bucks isnt much profit)
• Year 4: Iraqi economy stabilizes, You sell your 1 million Iraqi Dinars at a 1kID/usd exchange rate for 1000usd(990 in profit or a 1000% returns)

What you should have learned from that example is that the currencies of stable countries dont usually fluctuate greatly each day, its more of a gradual increase or decrease spread over months or years. Unless a large economic event happens.

What cause the currencies value to change?

Since it is an OTC market the exchange rate will change based on the percieved economic strength of the currencies being traded. Meaning just about anything could cause a change in the rate of exchange. Here are a few things though you should keep an eye on if you plan to trade Forex.

• Look at past changes and what was in the news at that time
• Unemployment Rates
• GDP of the countries
• Interest rates
• Actions of the Central Banks
• Major News stories i.e. government dissolutions(see Putin) or major scientific undertakings(see China)

Just keep in mind that the exchange depends on the values of two countries currencies. So if you buy euros thinking the usd will drop because of say an oil embargo or some other event, it does you no good if the euro also drops because of the predicted event. In otherwords remember to keep your eye on both the countries whose currencies you’re working with.

How do I find people to trade with?

Since its an over the counter market and most of the exchange volume is done by large banks, you probally will have to either go through a bank or a broker/dealer company. I have yet to try any of the big forex trading companies but I plan to give them a shot so I would greatly appreciate any recommendations to trading companies you prefer.

The Best Forex Guide OnLine
Thanks to Jaswilli77 on DP for recommending me the site babypips.com. If you are looking to trade Forex I would recommend going through their “school” it doesnt cost anything but time and teaches you in a language a baby could understand.

There is a bit more information in relation to the actual process of exchanging and there will be a “How to trade Forex!” post once I’ve lost or gained a bit more money with Forex. I am even more interested in Forex now that the US dollar is so weak cause I’d like to take advantage of that to gain money instead of continue to loose money as a result of it.

Disclaimer: All information I post is what I believe to be true but I am not an account or a trained financial advisor and Forex just like stock is not a sure thing. You can lose alot of money so before you spend any money or do anything consult a professional financial advisor.