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 The investor's goal in Forex trading is to
profit from foreign currency movements. Forex trading or currency trading
is always done in currency pairs. For example, the exchange rate of EUR/USD
on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex
rate" or just "rate" for short. If the investor had bought 1000 euros on
that date, he would have paid 1085.70 U.S. dollars. One year later, the
Forex rate was 1.2083, which means that the value of the euro (the
numerator of the EUR/USD ratio) increased in relation to the U.S. dollar.
The investor could now sell the 1000 euros in order to receive 1208.30
dollars. Therefore, the investor would have USD 122.60 more than what he
had started one year earlier. However, to know if the investor made a good
investment, one needs to compare this investment option to alternative
investments. At the very minimum, the return on investment (ROI) should be
compared to the return on a "risk-free" investment. One example of a
risk-free investment is long-term U.S. government bonds since there is
practically no chance for a default, i.e. the U.S. government going
bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, 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 increase in value, you must sell back the
other currency in order to lock in a profit. An open trade (also called an
open position) is a trade in which a trader has bought or sold a
particular currency pair and has not yet sold or bought back the
equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is
speculative. In other words, the person or institution that bought or sold
the currency has no plan to actually take delivery of the currency in the
end; rather, they were solely speculating on the movement of that
particular currency. |
