More than 95% of all forex trading today is for speculative reasons (e.g. to make a profit from currency movements). The remaining 5% goes to hedging and other activities.
Forex trades (trading onboard internet platforms) are non-delivery trades: currencies are not physically traded, but rather there are currency contracts which are agreed upon and performed. Investors to such deals or contract undertake to fulfill their obligations agreed upon: one side undertakes to sell the amount specified, and the other undertakes to buy it. As mentioned, over 95% of the market activity is for speculative purposes, so there is no intention on either side to actually perform the contract (the physical delivery of the currencies). Therefore, the contract or Forex Deal ends by the offsetting it against an opposite position, ending in the profiting and or loss involved in the deal.
Components of a Forex deal
A Forex deal is a contract agreed upon between the trader and the market- maker (i.e. the Trading Platform). The contract is comprised of the following components:
The currency pairs (which currency to buy; which currency to sell)
The principal amount (or "face", or "nominal": the amount of currency involved in the deal)
The Rate (agreed rate of the actual exchange)
The frame is also a factor in some deals, but this article focuses on Day-Trading (similar to "Spot" or "Current Time" trading) in which deals have a lifespan of no more than a full day. Therefore the time does not matter in this situation. Note however, that deals can be renewed or (rolled-over) to the next day
The Forex deal, in this context, is therefore an obligation to buy and sell a specific amount of a particular pair of currencies at a pre-determined rate.
Forex trading is always done in pairs of currency. For example, imagine that the exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.5000 (this number is also referred to as a "spot rate", or just a "rate". If an investor had brought 1,000 euros on that date, he would have paid 1,500.00 US dollars. If one year later, the Forex rate was 1.5100, the value of the eruo has increased in relation to the US dollar. The investor would then have USD 10.00 more than when they started a year earlier.
However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. You must find that the (RIO) should be compares to the return on a risk. US governement bonds are considered the most risk free i.e. the US government is not likely to go bankrupt, or be unable or unwilling to pay its debts.
Trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does profit. An open trade (also called an "open position") is one in which a trader has bought or sold a particular currency pair, and has not yet sold or bought back the equivalent amount to complete the deal.
It is estimated that around 95% of the FX market is speculative. The movement of that particular currency pair.
Orlando Thompson Frequently writes articles on Forex and other related topics Visit Forex Trading System Copyright (c) 2008 Orlando Thompson |
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