The investor's goal in Forex trading is
to profit from foreign currency movements. Forex trading or currency
trading is always done in currency pairs. For example, the exchange
rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also
referred to as a "Forex rate" or just "rate" for short. If the investor
had bought 1000 euros on that date, he would have paid 1085.70 U.S.
dollars.
One year later, the Forex rate was 1.2083, which means
that the value of the euro (the numerator of the EUR/USD ratio)
increased in relation to the U.S. dollar. The investor could now sell
the 1000 euros in order to receive 1208.30 dollars. Therefore, the
investor would have USD 122.60 more than what he had started one 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. One example of a
risk-free investment is long-term U.S. government bonds since there is
practically no chance for a default, i.e. the U.S. government going
bankrupt or being unable or unwilling to pay its debt obligation.
Forex advantages
24-hour trading, 5 days a week with non-stop access to global Forex dealers.
An enormous liquid market making it easy to trade most currencies.
Volatile markets offering profit opportunities.
Standard instruments for controlling risk exposure.
The ability to profit in rising or falling markets.
