Want to tap into the largest financial market in the world?

It’s not bonds, or mutual funds, or money markets… Even the stock market can’t compare in size to the power of this moneymaking behemoth. Chances are, you’ve seen forex trading ads all over the internet and in magazines like Forbes, but do you really know the lowdown on the forex market?

Forex (or FX) stands for foreign exchange. The FX market is basically the place where people buy and sell currencies of all sorts. Dollars, pounds, rubles, pesos, and any other currency you can imagine are traded on a daily basis in the FX market.

Despite its size, the FX market really hasn’t been around for that long. Currency trading really only began on a large scale in the late 1970s as the world’s currencies came off the gold standard and became market driven.

Today, currencies like the U.S. dollar are floaters, which means that the market determines their value relative to other currencies. Back when the U.S. was on the gold standard, each dollar issued by the Treasury Department was tied to gold owned by the government. We’re not on the gold standard any longer, which means that that crisp dollar bill in your pocket isn’t translatable into gold. But that doesn’t mean it’s worthless.

Making Sense of the FX Market

Currencies have value relative to one another. In other words, to measure the worth of a Euro, you have to compare it to a dollar or another currency. As of this writing, the dollar is worth 0.7468 euros. Currencies can also be measured in indexes, like the U.S. Dollar index, which measures the dollar against a basket of other currencies.

Believe it or not, you’re playing the forex market every time you travel abroad. If you take a trip to Brazil, for instance, every dollar you have today is worth 2.29 Brazilian Real. If you’d taken your trip back in July, however, each dollar would’ve been worth only 1.60 Real. So, if you bring $1,000 on your trip, you’ll have 2,290 Real instead of the 1,600 Real you would’ve had back in July. If a 690 Real swing doesn’t sound like a lot to you, multiply those gains by the countless opportunities every day in the FX world.

Growing in Leaps and Bounds

Interest in the forex market has been booming lately.  This year, in particular, the drastic swings in worldwide currencies have helped many FX investors cash in on some huge gains, over incredibly short amounts of time.

The financial crisis has only amplified the currency movements over the past few months.  As governments throughout the world have announced assorted rate cuts, bailouts, and stimulus plans, the currency investors have had innumerable chances to use this volatility for their own benefit.

As I mentioned above, the dollar is worth 0.7468 euros today.  Back in July, however, one dollar was worth 0.64 euros… that’s a 16.7% movement in 6 months!  And that’s just one example. Forex traders can hop aboard these currency movements all over the world, buying everything from the Chinese Yuan, to the British Pound, to the Russian Rouble.

There can be a downside, however, to trading in the FX markets.  It requires many investors to make multiple trades each day, and to stay up throughout the night tracking their plays in markets overseas.

There is another way to get a piece of the forex pie though.  It’s an approach that lets you avoid the late nights and the frenzied trading, but still cash in on the massive profit potential that the FX market brings to the table.  We’ll be sending you more details on this strategy in the coming weeks, so be sure to keep an eye out.

Cheers,
Jonas Elmerraji

December 11, 2008

Jonas Elmerraji

Jonas Elmerraji is the managing editor of the Penny Sleuth, and an editor of Penny Stock Fortunes. Jonas also occasionally contributes to financial publications like Forbes, TheStreet.com, and Investopedia. He has been quoted as an investment expert in Investor’s Business Daily, Consumers Digest, and MSNBC.com among others. Before joining Agora Financial, Jonas worked at an investment management firm and at a “Big 4″ public accounting firm. He holds a degree in Financial Economics.

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