If you wish to speculate in the currency market, then the foreign exchange market, or "Forex," is one way to do it. Forex traders buy and sell currency electronically. It is a fast-paced market that is nearly 10 times the size of the global stock markets. Forex trading provides some benefits that other markets cannot offer, but it is exceptionally risky due to the high leverage that brokers provide.
Forex Market Hours
Unlike the stock market, which is open for a set duration each day, the Forex market operates 24 hours without break. This opens the doors for novice day traders to try their hand at active trading while maintaining a day job. However, the downside to this schedule is that major Forex moves can happen any time, even while you are sleeping or working another job. Thus you can never be certain that opportunities will arise at the time you choose to trade.
Currency Pairs
In Forex, you trade "currency pairs" rather than one specific currency. No currency has intrinsic value. Only an exchange rate between two currencies provides value. The U.S. dollar, for example, can rise in value against the Japanese yen while simultaneously falling in value again the euro. All currency pairs use six-letter ticker symbols, where the first three letters represent the "base" currency and the latter three are the "counter" currency. Technically, if you buy the euro-yen pair, noted as EURJPY, this will provide similar returns to simultaneously buying euros and selling yen, though this is handled behind the scenes. If you "short" EURJPY, then you profit from a decline in the euro's value against the yen, or a decline in the exchange rate.
Leverage
One of the defining characteristics of the Forex market is its leverage. Leverage refers to the ability to purchase greater assets than your capital technically allows. Exchange rates fluctuate in minute increments, thus leverage is necessary for most Forex accounts to profit from these tiny changes. Leverage can be as high as 1:200 in some countries, allowing a $1,000 account to purchase $200,000 of currency. This is highly risky if your trade moves against you. Because of this, new laws in the U.S. limit brokers to a maximum of 1:50 leverage for major currencies, as of October 18, 2010.
Simulators
Due to the high risks of Forex trading, those new to the Forex market should augment their education with the use of trading simulators. Fortunately, most brokers provide free simulation accounts for a trial of their trading platform. You can start with one, and when the trial expires, try another. The many choices could provide you with at least a year's worth of free simulation options. While you practice your trading risk-free, you can also see the differences between a broker's trading features and software environments.
