According to Sang Lee, managing partner at Aite Group, an advisory firm for the financial-services industry, average daily trading by individual investors on the foreign exchange market totaled about $125 billion in 2009, an increase from $10 billion in 2001.
The foreign exchange market, normally known as the “forex” or “FX” market, is the largest financial market in the world on which currencies are traded. Compared to the $74 billion a day in volume traded on the New York Stock Exchange (NYSE), the foreign exchange market towers with $4 TRILLION a day in trading volume. This $4 trillion number covers the entire global foreign exchange market; individuals otherwise known as retail investors trade $1.49 trillion a day.
Until recently, retail investors had difficulty trading on the foreign exchange markets, as it was largely the domain of banks, financial institutions, hedge funds, and the very wealthy. However, with the advent of the Internet and online brokerage accounts, the foreign exchange markets became much more accessible to the average individual investor.
The Internet allowed everyday investors to take part in foreign exchange trading through the use of Internet-based brokerage accounts and foreign exchange brokers. Foreign exchange brokers, such as FXCM, may be thought of like online stock trading brokers like E*Trade, as they enable anyone to play the foreign exchange trading game by opening an account and buying and selling in quantity. The large minimum transaction size can be met by brokers, as these are composed of thousands of investors placing orders through them.
There are many attractive aspects about trading in the foreign exchange markets: the small amount of capital needed to start trading, the liquidity of the market, the availability of leverage from foreign exchange brokers, and access to the markets 24 hours a day.
Nevertheless, it is an extremely complicated and risky market. Investors should be both knowledgeable and disciplined when it comes to trading in the foreign exchange markets (although the degree of knowledge could certainly vary depending on the type of trading strategy implemented). Many professionals recommend that investors interested in trading in the foreign exchange markets spend months practicing in a foreign exchange demo account online investing real money, since forex markets can be extremely risky, in part because of the leverage involved.
Although currency values do not generally fluctuate significantly, barring a major event, the availability of leverage can lead to huge losses in mere moments. For example, an investor can control $250,000 in a foreign exchange account by putting down $2,500 and borrowing the remainder from her or his foreign exchange broker. If the currency or currencies in which the investment is made decreases in value, an investor can stand to lose $250,000 even though he or she only originally invested $2,500.
When investing in foreign exchange markets, the primary goal is to hold a currency that appreciates in value relevant to the other currencies. The four most common currency pairs are the Euro vs. U.S. Dollar, the U.S. Dollar vs. the Japanese Yen, the U.S. Dollar vs. Swiss Franc, and the U.S. Dollar vs. the British Pound.
For example, assume you buy 50 British Pounds for 100 U.S. Dollars. The investment is held for one week, during which time the value of the pounds increased in relation to the U.S. Dollar such that the pounds could then be converted back into $120. The value of one currency in relation to another may be influenced by global factors, country-specific factors, politics, and economics, to name only a few. Accordingly, investing in currencies requires an understanding of many financial and non-financial concepts.
So, before pouring all your money into the foreign exchange market, it is wise to open a demo account. There are a variety of foreign exchange brokers through which demo accounts may be opened, one of which is eToro. It may also be wise, as suggested by experts, to determine your profit goals and loss boundaries ahead of time. This way you will ensure that you don’t get ahead of yourself. There is a lot of money to be made in the foreign exchange market, but it’s essential to understand how to do so first.
Published or updated April 4, 2013.