Unless you’ve been living under a rock the past decade or so, you’ve undoubtedly heard a new word enters the English lexicon — forex. Before the advent of the Internet, almost no one had ever heard the word, let alone knew what it meant. But now, it seems like everyone and their brother has a “foolproof” system for reaping tremendous profits trading currencies on the forex. While most of these systems quickly bite the dust — along with the traders employing them.
How the Internet Sparked the Boom in Forex Trading
Thousands of individual investors join the largest financial market in the world, the forex, every day, and many of them do realize their financial dreams without ever leaving the comfort of their home offices. And to think, none of this was possible just a few years ago, before the widespread adoption of the Internet.
The Forex-Internet Boom
For those that don’t know, “forex” is short for “foreign exchange,” and it is the market in which international currencies are traded. Historically, government central banks, hedge funds, major international banks, and extremely wealthy individuals have been the big players in the forex: George Soros, for example, made his fortune trading currencies — he made over $1 billion in a single month once! But ever since the Internet reached the masses, the forex has become a favorite trading platform of everyday individual investors like you and me.
Why has the Internet been so important to the expansion of forex participation? Well, for one reason, forex trades have zero commissions. This means in the days before the Net, investment advisors couldn’t make money convincing their clients to trade currencies, and without the Information Superhighway, individual investors had no way of placing forex trades themselves. But now, with worldwide cyber-connectivity, anyone and everyone can play the forex — it isn’t just for the Alan Green spans and George so roses of the world, now.
A Few Caveats…
It is important to note that while there are no commissions charged on forex trades, there is a spread between the bids and ask prices of each currency pair. For example, the currency pair of the U.S. dollar and the Canadian dollar, expressed as USD/CAD, may have a bid price of 1.0590, and an ask price of 1.0595. What the heck does that mean? It means that that you can obtain 1.0590 Canadian dollars for every one U.S. dollar, or you can pay 1.0595 Canadian dollars for every one U.S. dollar. In other words, you have to pay more for Canadian dollars than the bank is willing to buy them from you — if you’ve ever exchanged Canadian dollars outside of the forex, (i.e. on a trip to Canada), you’re undoubtedly familiar with this spread.
Secondly, it’s important to note that forex accounts allow you to have a tremendous amount of leverage. Typically, you can control $100 of currency for every $1 in your account. So, for example, if you were to risk $1,000 of your actual money, you could control $100,000 worth of currency. If the currency appreciated (went up) by 1%, you would make 1% of $100,000 — $1,000 — i.e., you’d double your money on a 1% move! But if the opposite occurred, if your currency depreciated (went down) by 1%, you would lose 1% of $100,000 — i.e., your entire investment. And you can imagine what would happen if your currency went down by 2% or more!
So the best advice is to play it safe. Read up on the forex and open a practice account before risking real money. The forex is the largest and most exciting financial market in the world, and you don’t have to be a genius to make money in it, but you should at least have the basics down. Good luck!