FOREX - Foreign Exchange Trading

FOREX trading refers to buying and selling foreign currency.

The currency of one country is weighed relative to the currency of another country to determine trading value.

The value of a foreign currency is a major factor when trading stocks, earning foreign income, purchasing goods and services and paying international loans. OVer the past year, the FOREX betwen the New Zealand dollar has ranged from 52cents NZ to 70 cents against a single US Dollar. This has meant that income has ranged by nearly 40 per cent. This significant variation can make the difference between a business being profitable or making a loss. This variance also provides a highly speculative basis upon which investments can be made. Just like stocks, investors attempt to buy a particular currency when it is high against their own currency and then sell when it is low. For example

Investing $USD 1,000 in NZ dollar at 52 cents will buy $NZD1923

When the dollar rises to 72 cents against the USD, the same money will return $USD1013.90 - a 13.9% return on investment in just 4 months, which equates to an annual percentage rate [APR] of 41.7%.

If you were trading from the NZ currency - you would buy USD when they FOREX rate was at 72 cents - as you get more USD for your NZD. Then sell when the FOREX rate is at 52 cents for the same level of profit.

Currency Control

Most countries manage the value of their currency, or money using the 90day bank rate. This rate sets the term investment rate of the currency as provided by banks and other financial institutions. When the rate is high, investors from other countries are attracted to the currency and the currencies value rises against other currencies in a supply-demand economics model.

FOREX Market

The foreign exchange market trades massive volumes every day. Currency trading is a very 'liquid' investment, meaning it is readily converted to cash in your own currency.

With the time zones - FOREX markets are trading 24 hours a day, and on Saturdays in some countries - whilst it is still Friday in another country. Likewise, on a Monday morning in NZ, the US stock and FOREX markets are closed, but trading in the US currency can be made in the NZ market anyway.

With almost two trillion dollars traded in an average trading day, there is a lot of money changing hands, and small variances between currencies can mean big gains and losses for traders.

FOREX accounts for around ten percent of the total trading from country to country, but the popularity trading in the FOREX market continues to grow.

NEXT: The Differences Between FOREX Trading and Stock Trading