The investor's goal in Forex trading is to profit from foreign currency
More than 95% of all Forex trading performed today is for speculative purposes
(e.g. to profit from currency movements). The rest belongs to hedging
(managing business exposures to various currencies) 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. 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
A Forex deal is a contract agreed upon between the trader and the marketmaker
(i.e. the Trading Platform). The contract is comprised of the following
Time frame is also a factor in some deals, but this chapter focuses on Day-
Trading (similar to "Spot" or "Current Time" trading), in which deals have a
lifespan of no more than a single full day. Thus, time frame does not play
into the equation. Note, however, that deals can be renewed ("rolled-over")
to the next day for a limited period of time.
The Forex deal, in this context, is therefore an obligation to buy and sell a
specified amount of a particular pair of currencies at a pre-determined
Forex trading is always done in currency pairs. For example, imagine that the
exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.1999
(this number is also referred to as a "spot rate", or just "rate", for short). If
an investor had bought 1,000 euros on that date, he would have paid 1,199.00
US dollars. If one year later, the Forex rate was 1.2222, the value of the euro
has increased in relation to the US dollar. The investor could now sell the
1,000 euros in order to receive 1222.00 US dollars. The investor would then
have USD 23.00 more than when he started a 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.
Long-term US government bonds are considered to be a risk-free investment since
there is virtually no chance of default - 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
increase in value, you must sell back that currency in order to lock in the
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. 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.