Forex trading involves trading with currencies from different countries to make a profit. Forex stands for Foreign Exchange. On you will have seen when the dollar is strong versus the pound or euro, there is lots of action between these currency exchanges, and this is what Forex traders do. Wait for the market to be weak/strong and trade to make a profit and a high R.O.I. (return on investment.)
Forex is usually done through a broker or a professional Forex trader, recently there have been an introduction or Forex “bots” which automatically trade and can make you a lot of money in the process, but most of these are illegal.
An example of Forex trading, to keep this simple I will just use the Euro Vs USD rate. In 2005 if you brought 1,000 Euros it would cost you 1,200 USD. By the start of 2006 if you traded these currencies back you would have got 1,300 USD for your 1,000 Euros, this is a $100 profit. That is an oversimplified version of this, but you get the idea. There is also something called the risk vs. reward ratio. You do not want to invest in something that is too high risk and low reward.
Trades can be done through a broker, or a “market maker” orders can be made over the internet very quickly and once passed by a broker to an interbank market, where the trade happens. Then your account funds are credited or removed. This can all happen extremely quickly, it usually only takes seconds. That is the basic of what is Forex trading but how can you trade it effectively and increase your R.O.I.
A few other important things you need to understand before diving in, is timing, with Forex trading timing is everything, if you trade at the wrong time, a can lose a lot of money, alternatively, if you trade at the right time, then you can make a lot of money. You also need to know what times markets are open, their trading hours, and when best to trade in the day/week. Mondays, Fridays and weekends are never a good time to invest whereas midweek always seems to be a winner with many people. Another important thing is understanding trends; you don’t want to invest in a trend that will stop as soon as you invest, you need to understand how and when to trade.
With advances in technology, the foreign exchange market matured significantly, gathering more and more investors around the globe. Brokers responded to this by narrowing the spread and lot size which further encouraged those with smaller investments. In the late 1990s, brokers introduced mini lots for small investors for example students, house-wives, or perhaps risk-averse investors. The trading could be done online thereby making the need for physical presence at the trading floor with a paper in your hand, shouting bids and offers unnecessary. Investors from around the world could simply put their money in this market simply by using a trading platform on a computer system and withdraw from this whenever they desired.
If you are looking for a list of forex brokers, check this out.