FOREX, or Foreign Exchange, is buying and selling of currencies. The US dollar is almost always the base currency against which other currencies are bought and sold in real FOREX trading. This market has more buyers and sellers and daily volume than any other in the world.

Most liquid market in the world

Non-Monopolistic

24 hour Trading

In Forex, you decide how much you are prepared to loose or make.

Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver coins. Goods were traded against other goods or against gold. So, the price of gold became a reference point. But as the trading of goods grew between nations, moving quantities of gold around places to settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was sought by which the payment of trades could be settled in the seller's local currency. But how much of buyer's local currency should be equal to the seller's local currency?

The answer was simple. The strength of a country's currency depended on the amount of gold reserves the country maintained. So, if country A's gold reserves are double the gold reserves of country B, country A's currency will be twice in value when exchanged with the currency of country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted and used worldwide.

During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was created in quantities that far exceeded the gold reserves. The currencies lost their standard parities and caused a gross distortion in the country's standing in terms of its foreign liabilities and assets.

After the end of the second WORLD WAR the western allied powers attempted to solve the problem at the Bretton Woods Conference in New Hampshire in 1944. The conference resulted in the creation of:

The World Bank

International Monetary Fund (IMF), and

Bretton Woods Exchange System

The World Bank and the International Monetary Fund are collectively known as the Bretton Woods Institutions. Under the Bretton Woods Exchange System, the currencies of participating nations could be converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and the parities of the world's leading currencies were pegged against the US Dollar.

However, this fixed exchange rate system allowed any country to devalue or revalue its currency to fulfill the local financial and economic needs, particularly to make their exports more competitive in the global market. The massive US balance of payments deficits of early 1960's began casting shadows of doubt in the strength of the US dollar. During the same decade, the currency crisis in Europe, mainly in United Kingdom, France and Germany brought about the end of the Bretton Woods accord.

The United States, under president Nixon, retaliated in 1971 by devaluing the dollar and forcing realignment of currencies with the dollar. The leading European economies tried to counter the US move by aligning their currencies in narrow band and then float collectively against the US dollar.

Fortunately, this currency war did not last long and by the first half of the 1970's leading world economies gave up the fixed exchange rate system for good and floated their currencies in the open market. The idea was to let the market decide the value of a given currency based on the demand and supply of the currency and the economic health of the currency's nation. This market is popularly known as the International Monetary Market or IMM. This IMM is not a single entity. It is the collection of all financial institutions, that have any interest in foreign currencies, all over the world. Banks, Brokerages, Fund Managers, Government Central Banks and sometimes individuals are just a few examples.

This is very much the present system of exchange of foreign currencies. Although the currency's value is dependent on the market forces, the central banks still try to keep their currency in a predefined (and highly confidential) fluctuation band. They accomplish this by taking one or more of various steps.

Currency markets are highly speculative and volatile in nature. Any currency can become very expensive or very cheap in relation to any or all other currencies in a matter of days, hours or sometimes, in minutes. This exact volatile nature of the currencies is what attracts an investor to trade and invest in the currency market.

While some lose their life's savings, other's make fortunes in FOREX. Just like any other speculative business, the higher the risk = the higher the profit. Your money in a fixed deposit account of a bank is relatively safer. But the return is nothing when compared to the profits one can make on a daily or hourly basis in FOREX. But you can also lose the same amount in FOREX as easily. Hence, the risk in FOREX is higher than the risk in a fix deposit account in a bank! So, the investor should keep the risk factor within a reasonable amount he or she can easily afford to lose. The investment should only be so much that if the entire sum is lost, it will not effect the investor's normal life style.

Later, in the tutorial, an investment strategy is discussed. This strategy, by no means, makes any investment risk free. Rather, it lets you decide BEFORE you venture out in the currency markets, the amount of money you can afford to lose.

Simply put, FOREX trading is the buying and selling of currencies. The US dollar is almost always the base currency against which other currencies are bought and sold. Of course, one's local currency can also be used as a base currency. In such a case it is called a CROSS TRADE. Cross trading is then an exchange of two currencies where the US dollar is not involved.

Say you suspect that the Japanese Yen might appreciate in value against US dollar in the near future. The current exchange rate is 120 yen to a US dollar. You go to the bank and exchange US$ 10,000 for 1,200,000.00 yen.

Profit:

Later on, as expected, the Yen appreciates by five yen to 115 yen to a US dollar. You then take your yen back to the bank and exchange them into US dollars. You will get US$ 10,434.78. This extra US$ 434.78 is your profit on top of your initial investment of US$ 10,000.

Loss:

On the other hand, instead of appreciating, the yen further weakens. After all, it was only an expectation that the Yen will appreciate, not a guarantee. Say, it weakens by five yen to 125 yen to a US dollar. Of course, you now have a choice to either hold onto your yen until it appreciates or exchange them back into US dollars. Suppose, you want to exchange them back into dollars for fears of further yen weakness. You then take your yen back to the bank and exchange them into US dollars. You will get US$ 9,600.00. Your loss is US$ 400.00 . Now your initial investment of US$ 10,000 is reduced to US$ 9,600.

FOREX trading is neither gambling nor should it be perceived as such. In gambling, once you place a bet you cannot withdraw from a losing situation. You either win or lose. On the other hand, in FOREX, you decide how much you are prepared to lose or wait until you are in a profit situation. FOREX trading provides several means to accomplish just that.

Hence, one can trade FOREX euphorically or in an organized manner. The tools and techniques are there, it's up to you to use them for your best interest.

Liquidity:

FOREX markets are very liquid. That is, you can withdraw or cash in your investments relatively faster and cheaper than most other types of investments. For example, it may take you weeks or months before you are able to cash in on your real estate, antique collection, car, or fixed deposit in a bank (where you might pay a surcharge for cashing prematurely). Moreover, in all the above mentioned scenarios, except the fixed deposit, if the buyer learns that you need cash rather urgently, you might not get the fair market price of your original investment!

Non-Monopolistic:

It is estimated that the daily turnover in the FOREX market is around US$ 1.3 Trillion to US$ 4.5 Trillion. It can then be safe to state that a market of such huge volume will be difficult, if not impossible, to be controlled or monopolized by a single entity. It will take a huge financial effort to target any particular investor to incur loss or profit. A vigilant trader/investor will get a chance to observe several indicators and take necessary precautions before there is a big change in the exchange rates.

Non-Stop Trading:

Almost all of the stock exchanges have limited working hours. All the trading must be completed within this period. It means that if you have a losing position and could not dispose of it the same trading day, you will have to wait for the next trading day. In the meantime, there might be some news reports or world figures which may affect the category of the business, or the company of which you hold stock. But you can't do anything about it because the exchange is closed for the day!

Foreign currencies, on the other hand, being foreign to all but one nation, may be traded all around the world, 5 days a week and 24 hours a day. For example, a transaction originates in Tokyo, Japan and is carried over to Hong Kong . By the time the Hong Kong markets are closing, the European markets are open. By the lunch time in London, the New York markets join the action. Shortly after that, the US west coast markets kick in. Just before the west coast markets call it a day, the New Zealand markets are opening, and shortly after that, the Australians start their business day. An hour after that, the Japanese markets are open. So, you see, the FOREX market never sleeps.

Large banks with branches in several countries usually have at least one trading desk open until the next one joins the action. The same is true for large brokerage houses, which usually have trading links with several other brokerage houses or their own branches, which form a global trading network that is operational at any point on the globe at any given instant!

Hence, in today's day and age, a FOREX investor/trader is able to trade almost 24 hours a business day, 5 days a week. Enabling him or her to take advantage of any development anywhere in the world, while the local stock market sleeps.

Direct Forex has opened up to take advantage of On-Line Trading on the net. This will enable the FOREX trader to trade from the comfort of his office or home around the clock.