What is FOREX?

The market

The global currency trading market called Foreign Exchange, Forex or FX is the biggest and fastest growing market today. Its daily turnover is more than 2 trillion dollars. The participants in this market are central and commercial banks, corporations, institutional investors, hedge funds, and private individuals like you.

What happens in the market?

Markets are places where goods are traded, and the same goes with Forex. In Forex markets, the goods are the currencies of various countries. For example, you might buy euro with US dollars, or you might sell Japanese Yen for Canadian dollars. It’s as basic as trading one currency for another.
Of course, you don’t have to purchase or sell actual, physical currency: you trade and work with your own base currency, and deal with any currency pair you wish to.

The Advantage of the Leverage

The ratio of investment to actual value is called leverage. Using a $1 000 to buy a Forex contract with a $100 000 value is "leveraging" at a 1:100 ratio. The $1 000 is all you invest and all you risk, but the gains you can make may be many times greater.

How does one profit in the Forex market?

Obviously, buy low and sell high. The profit potential comes from the fluctuations of the exchange ratio of the currencies (e.g. EUR/USD, GBP/JPY). Unlike the stock market, where shares are purchased, Forex trading does not require physical purchase of the currencies, but rather involves contracts for amount and exchange rate of currency pairs.

What is a Forex deal?

The investor’s goal in Forex is to profit from foreign currency fluctuations.
More than 95% of all Forex trading performed today is for speculative purposes (i.e. to profit from currency movements). The rest belongs to hedging (managing business exposures to various currencies) and other activities.
Online Forex trades (trading on Internet platforms) are non-delivery trades: currencies are not physically traded, but rather there are currency contracts which are agreed upon and performed. Both parties to such contracts (the trader and the trading platform) undertake to fulfill their obligations: 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). Thus, the contract ends by offsetting it against an opposite position, resulting in the profit and loss of the parties involved.

Margin

Banks and/or online trading providers need collateral to ensure that the investor can pay in the event of a loss. The collateral is called the margin and is also known as minimum security in Forex markets. In practice, it is a deposit to the trader’s account that is intended to cover any currency trading losses in the future.
Margin enables private investors to trade in markets that have high minimum units of trading, by allowing traders to hold a much larger position than their account value. Margin trading also enhances the rate of profit, but similarly enhances the rate of loss, beyond that taken without leveraging.

How risky is Forex trading?

You cannot lose more than your initial investment (also called your margin). The profit you may make is unlimited, but you can never lose more than the margin. You are strongly advised to never risk more than you can afford to lose.