What is Forex Investing?

Almost any financial website these days (this one included -- through the Google ads on the site) have ads for Forex investing/trading. I see them all over. In addition, I fight them quite often as it seems sites that are into Forex investing like to leave spam on other websites to increase their search engine rankings. But in all of this visibility for Forex investing, I have just one problem: I don't know what it is.

So I went to Google and found a couple of sites that educated me. Here's the first piece I ran into -- from Yahoo -- and their summary of Forex trading:

The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders' investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

Here's a bit more from Wikipedia:

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another.

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.

This piece, in particular, then goes into detail on how banks, hedge funds, and others can invest/trade in the Forex market. My very limited layman's viewpoint is that Forex trading is simply trading in currencies. Like with other investments, I assume that the goal is to trade when you expect your currency to increase in value relative to currencies you are selling (while others buying what you're selling are betting the other way.)

That said, how does an individual invest in the Forex market? And, the bigger question, why would anyone want to? Does anyone have experience with automated forex trading platforms? Is it safe to delegate your trading decisions to algorithms? It seems like it's VERY speculative and akin to commodities -- you can lose a TON real fast if you don't know what you're doing. 

I bet there are some of you out there that know at least the basics of Forex investing. If so, please share your thoughts with the rest of us -- I'd love to hear your insights.

Comments

[Rod Ferguson]

I'd recommend www.dailyfx.com - set up a test account and try your hand. No money involved (either from you or paid to you) so it's a great way to see if you'll like FX trading. You can also set up a paid account with them if you decide you want to start trading. Paypal can also be used to "trade" currencies (deposit some US Dollars, convert to Canadian Dollars at a small fee, convert back at a small fee.)

You're right on both counts; it is pure speculation and you can lose your shirt in microseconds if you aren't paying attention, however, you can make really decent profits on a little investment - especially since most trading is done on margin. Currencies traditionally move in ranges of less than one cent per day (1 cent = 100 'pips') with a 75-pip profit on a transaction considered a "good day". So, if you want to make profit in excess of a few cents per transaction, you have to margin. Most I've seen margin at 1000 to 1, so $100 US = $100,000 margined and a 50-pip profit would translate to $500 in real profits. The reverse is true, of course; a 50-pip loss is $500 lost when you only have $100 in the game, and then it's margin call time.

I own currencies, but non-margined and in a deposit account. Unless you like "extreme trading" (ala 'Extreme Sports'), I'd advise away from FX trading.

[Kim]

Why don't you ask Japanese retail investors how Forex trading on margin worked out for them?

http://www.nytimes.com/2007/09/16/business/worldbusiness/16housewives.html?_r=1&scp=15&sq=mrs.%20watanabe&st=cse

[bubba_joe]

forex trading is a zero sum game.

unless you are smarter than the vast majority of currency traders, you will likely lose money.

stay away from currency trading.

[Param]

2 simple words - "STAY AWAY".
This is akin to day trading on margin & is the easiest way to ruin your financial life. If you need to save or hold other currencies for real purposes (personal or business - travel, education, buying foreign companies), there are many banks that would allow you to open an account in a different currency & convert/hold your savings there.

[choroid]

Forex exchange is the place where you can lose money faster then Las Vegas.

[Craig]

The way it was presented to me had the smell of SCAM all over it. After reading these comments, I'm glad I stayed away.

[Mark]

ForEx trading is speculation, just like day-trading, but there are ways to INVEST in foreign currencies.

For example, if you believe that the US Dollar is unusually strong right now, and will decline in the next 10 years (not 10 days!!), you may want to buy Euros, or Yen , or Yuan. I held Chinese Renmimbi for several years, and made some money but not a spectacular amount.

One easy legitimate way to do this is through Everbank - they offer money market accounts and CDs denominated in many foreign currencies. Just be aware that you are not protected from the fluctuation in exchange rates by FDIC insurance.

[Rod Ferguson]

I can vouch for Everbank myself. I've used them for years.

[Rick]

I'm not entirely sure why people have such an aversion to forex trading. In contrast to what Craig said, Forex is NOT a scam. It's a perfectly legitimate endeavor.

Also, Forex is not necessarily speculation. Forex traders can have perfectly legitimate reasons for executing the trades they do.

With regular stock trading, there are two major strategies for trading: technical trading and fundamental trading. With fundamental trading, the investor is seeking to make money off the appreciation of a stock due to its fundamental values -- perhaps the company is a good company, but it's stock price is just a bit low right now. With technical trading, a trader is seeking to make money off the short-term fluctuations in stock price. The basic idea is that investor psychology is predictable, so a stock price is also predictable given past price movements.

These same strategies also exist in Forex trading. I might think the USD will drop in relation to the EUR, given current geopolitical events -- like, for instance, the current US government is running a massive and ever-increasing deficit, and China is no longer willing to finance such a deficit. I might take a position accordingly. Technical forex traders make money using price movements, the same way technical stock traders do.

Now, as with everything, you have to know what you're doing. You can't just plunge headfirst into forex trading and expect to become rich. You also can't just go out and buy random stocks and expect to become rich. You have to know what you're doing. Don't invest in Forex if you don't know what you're doing. Also, I will admit that it is harder to invest in currencies vs stocks, because as a previous poster mentioned, forex is a zero-sum game. With stocks at least, you can be reasonably sure they will go up in the long term. With forex, prices will most likely remain flat, or run in a very cyclical pattern in the long term. But, while it may be harder, it doesn't make forex any less legitimate.

[Dave]

I love investing, but I wouldn't touch Forex with a ten foot pole. Stay away.

[Tim]

After taxes etc I made about 180k$ last year via a few well-timed long game forex trades (geopolitical based). I've built very high-speed forex trading applications for my day job and wouldn't fancy going up against them in the evening. We're talking millisecond response times to scalp the unwary..

[Eugene Krabs]

I don't agree that Forex is a scam. However, the level of risk is extraordinary. Perhaps the highest risk / highest gain trading out there. I trade stocks on a regular basis, but I too will not touch Forex with a ten foot pole. Stocks are more than good enough for me.

[Valutahandel]

It is important to note that Forex trading is not easy. It can be very difficult to make foreign exchange transactions accurately and efficiently. While many have made great gains in the currency market, others have lost significant sums of money. Why is this so? A number of factors and simply say they have made bad decisions would be inaccurate. Some very wise move that does not happen to be effective. However, it would be safe to say that most people lose money by investing forex are not only getting the right signals and are not affiliated with the broker the right.

[yunus]

dont even try with your real money. all the frauds around there. no one is perfect and true. all the brokers and the companies are there to cheat.