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Forex is understandably becoming more and more popular. Until recently currency fluctuations were merely seen as an aspect of regular investing. Nowadays institutional investors are treating forex as a separate class and I will tell you why.

Forex trading is the trading (buying and selling) of a currencies. There are various reasons to trade currencies and it is not unlikely that you have already traded currencies yourself. Perhaps you paid with Pesos in Mexico or Canadian dollars in Canada. This means you converted your home currency, the US dollar, into the foreign currency. Let me explain why institutions trade forex for profit.

The main reason for institutions to trade forex is to hedge their foreign investments. For instance, when a US company invests in a European plant than the US company has to convert some US dollars into Euro’s. For the US Company this means an added risk on top of the conventional risks involved in investments, namely the currency risk. When the US company invest 1 million euro’s in the European plant than it has to convert US dollars into Euro’s. Assume the EUR/USD exchange rate is 1.45 then the €1 million would cost the company $1.45 million. Here, the currency risk is the possible fluctuation of the exchange rate. The company could benefit when the dollar strengthens or lose money when the dollar weakens. Let’s say for instance the EUR/USD rate ends up at 1.40. This would mean the investment worth 1 million in Euro’s is worth 1.4 million dollar. This would be a 3.4% loss. This doesn’t seem much but fluctuations like this could occur in a matter of days. Imagine what could happen over the course of a year, or multiple years.

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From the 18th of July 2008 until the end of 2008 the dollar strengthened over 10%! But 10% is not that much, you might say. Well, that’s partially true. One of main characteristics in forex investing is the use of leverage. A lot of forex trading platforms provide the use of over 200 x leverage! This means that a gain of 10% could turn into a gain of 2,000%! This is one of the reasons why this market is so attractive.

Another fact is that the forex market is the most liquid financial market as you can trade currencies 24 hours a day 7 days a week! The average daily trading volume amount a whopping $3.98 trillion. That is $3,980,000,000,000 traded every day.

The hard part in forex investing is to predict which way the rates will go due to the vast variety of factors that influence the exchange rates. With the right knowledge and, moreover, the right forex software you can profit from the exchange rate fluctuations. There are a lot of software packages out there which assist you in making buy or sell decisions. The software will analyze trends and patterns for you which makes forex trading a lot easier. Most trading systems will let you open a practice account, so don’t hesitate to try it out.

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