Over the past decade, an unprecedented number of individuals are investing money in nontraditional financial instruments. As a result of both low interest rates on so-called "safe" investments like savings accounts and certificates of deposit, and increased exposure to the stock market through various employer retirement plans, the stock market is no longer beyond the reach of most individuals. In addition, the dot-com boom of the 1990s reinforced the notion that the easy day trade could generate significant returns.
Today, there is a new market that is generating excitement and interest from investors: the forex market. Stories abound about people making fortunes with forex. But what, exactly, is forex and how does it work? Here are the answers to five common questions about forex.
1. What is Forex?
Forex stands for the foreign exchange market. Also called FX, forex is the exchange of currencies. It has an enormous trading volume (estimated at over $2 trillion per day) and is primarily traded by financial institutions, investment firms, governments, and central banks.
2. How is Forex Traded?
Unlike centralized stock exchanges (like the New York Stock Exchange or NASDAQ), forex is an over-the-counter trade. Therefore, there are multiple prices for currencies. The rates depend upon who is trading. Because markets around the world open and close at various times, forex is traded virtually 24 hours a day on weekdays.
3. Why is Forex Trading New?
Forex trading isn't new; what's new is the ability of individuals (as opposed to institutions) to participate in forex trading. These trading systems became available to individual with the advent of the Internet and have gained in popularity since the late 1990s.
4. What, Exactly, is Being Traded?
Forex isn't a trade in the traditional sense. You are not, for example, trading money for goods and services. You also aren't providing capital to a company in order to see a future return. With forex, you're betting on the shifting values of the world's currencies as compared with one another. For example, you may bet that the value of the Euro will rise against the value of the U.S. dollar. Or vice versa.
5. What Tools are Available to a Forex Trader?
Because the foreign exchange market is extremely volatile, individual forex traders need to utilize software in order to track their positions and the market. An automated forex expert advisor system (often called "EA" or "EAs") can automatically carry out opening and closing orders. Because the forex market is affected by financial news, these EAs can be utilized to initiate trades during important news. A forex signal can also automatically set a stop-loss, take-profit, and trailing-stop.