Forex, or FX, stands for Foreign Exchange. It refers to the practice of spread betting on the currencies market. In Forex, you place bets on whether a particular currency will rise or fall against another. For this reason, Forex trading always involves pairs of currencies, rather than just one. There are many popular pairings of currencies to bet on, including major ones like US Dollar and British Pound, and minor currencies as well. The currencies you bet on don’t have to be major ones, but you do need to know a bit about how they tend to perform.
How does Forex actually work, however? It’s actually very similar to spread betting, in that you are placing money on a bet that one currency will move a certain number of points (known as pips) on an index. For example, you decide the pound will move up against the Euro. You bet a £1 for every pip the pound moves up. For every pip in your favour, you gain a £1; for every pip against you, you lose a £1. As with spread betting, the potential for losses far in excess of the money you bet is high.
Forex is one of the oldest forms of trading, with an ancestor of it appearing in Biblical times. In its modern form, however, it is fairly new. Up until the 1970s, foreign currency exchange was quite carefully and strictly regulated by the state. It was in the 1970s that a free-floating global currency market really began to flourish with the end of the Bretton Woods system.
Foreign exchange trading is a huge and growing business. In fact it is the world’s most liquid market, with around $3.98 trillion on average changing hands daily in August 2010. The UK is in fact the world’s leading centre of Forex, with over a third of all transactions taking place here. Forex trading is all over-the-counter, meaning it is transacted directly between brokers and dealers rather than through an exchange. This means that having an experienced and competitive broker working with you is extremely important.
Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.