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Foreign Currency Exchange Trading

Introduction to Foreign Currency Exchange Trading

You may have heard a lot of talk about foreign currency exchanges in the financial news recently, and found yourself at a loss trying to decipher what was going on. You’re not alone. Foreign currency exchange is a deep, complicated topic, and much like other markets it has its own jargon which serves to add another layer of confusion. This article will give you an introduction to the basics and show you where to go to learn more. (Or to get involved yourself).

Simply stated, the Foreign Currency Exchange Market (a.k.a. the “FX” market, “forex” market) is where you buy and sell different currencies. The price of one currency for another is called the Exchange Rate. It is usually expressed in easy-to-understand ratios from one monetary unit to another. For example, at the time of writing, the dollar to yen exchange rate is one US dollar to 91.54 Japanese yen.

Currencies change in relative value to each other for all sorts of reasons too deep to be examined here. Through speculation on these changes in value, investors attempt to earn money by “buying” forms of currency that they estimate will grow stronger, thus granting them profit and giving them greater buying power.

Large banks are the biggest participants in “forex” exchanges. When billions of dollars are invested, even small percentage changes can mean very significant gains. But it is possible for individual investors to participate in Foreign exchange, too. There are hundreds of brokers who can facilitate this. But like brokers in any market, make sure that you choose a reputable one with a solid track record.

Here are some of the top forex services available to you online:

Forex.com
Forex.com offers a host of tools for investors, but more importantly they give tools to learn with first. They offer a free $50,000 “practice account” where you can paper trade by investing imaginary money into the actual forex market and see how you would have done. This is an excellent way to get your feet wet without risking real money. Forex.com also offers a large amount of ideas and guidance for those who are just getting started, which can be invaluable to the beginning trader.

Dukascopy
Dukascopy is a Swiss forex firm that also offers its users a “demo account” with which they can get used to their system and the principles of foreign exchange trading. Offshore trading services can be beneficial to investors because of better regulatory environments, but as always you should study out the pros and cons as they pertain to your financial goals.

The New York Fed has an excellent article that goes in-depth into the forex market. They break down the market, industry jargon, and trading strategies in an easy-to-understand fashion. Take a couple of hours and study it well before attempting to jump in: http://www.newyorkfed.org/education/fx/foreign.html

As with any market, use caution when you are first learning the ropes. Beware of “sure things”. And make the most of “practice” opportunities that companies offer – the more experience you can get under your belt before putting actual skin in the game, the better.

Additional topics

Financial Dictionary: Accounting, Business & International FinancePersonal Finance - Savings Accounts, CDs, the Stock Market, and Other Investments