Global Forex: What It Is And How To Make Money

Global forex or foreign exchange trading is a way of making money that you may have seen advertised on TV, in magazines or online. Forex and FX are simply short ways of referring to foreign exchange which involves buying and selling currencies on the world's financial markets.

Of course, exchanging currencies is something that people do all the time when they go on vacation or on a business trip overseas. You simultaneously sell your own country's currency and buy the currency of the country that you are visiting. Businesses are also involved in currency transactions when they import or export goods.

However, Global forex trading is very different from this. It is a speculative investment, which means that the trader does not really want the currency that he is buying. He is just investing in it with the hope that it will increase in price. Later, he will trade it back.

Access to the global market is provided by forex brokers who allow the small time trader to find somebody to exchange with. This is all done online and almost instantly. Just about anybody with a computer and a broadband connection can become involved. The market is even open 24 hours a day Monday to Friday so you do not have to be online during the daytime if you have other commitments.

All currency transactions involve an exchange, because you have to give one currency in order to get another. This means that you are always dealing in two currencies. These are known as currency pairs. Each currency has a three letter code, for example USD for US dollar, EUR for euro, GBP for British pound. The most traded pair is EUR/USD, the euro and US dollar.

Traders are able to control much more money than they actually have themselves. This is called leverage or trading on margins. It works through a broker. You would invest a certain amount in your forex trading account with the broker. Let's say you invested $1,000 in a mini forex trading account. When you wanted to open a trade, you might put up $100 of that. If you used 100 times leverage, which is pretty low for the forex market, you could control a trade of 100 x $100, i.e. $10,000.

The broker guarantees the remaining $9,900 but he does not have to risk losing his money because he can close the trade if things go against you and you lose what is in your account. Of course, you would not want to risk all of your money, so you would put in place what is called a stop loss that would close your trade automatically if you started to have a loss beyond a certain point. In this way you could limit your risk to $50 or less. You would not want to risk more than 5% of your funds which would be $50 on a balance of $1,000.

Most experienced traders recommend risking less than this, say 2%. This is a very important question because risk management done well or badly can make or break the forex trader. If you are thinking of getting into financial forex trading you will understand that it is risky and not all of your trades will be successful. You could have several losses in a row or a slowly decreasing fund balance. It is vital that your risk per trade is low enough that a good part of your funds will remain intact through a situation like that, so that you can recover the balance later if things begin to go well again. It is also important to be able to remain calm under pressure so that you do not make mistakes at critical moments.

The advantage of leverage is that it allows a successful trader to make a lot of money in a short time. However, it is important to remember that money can be lost quickly too. Fortunately, most brokers offer a demo account facility so that you can try out the system and practice your financial forex trading skills without risking any real money.