Forex....Shouded In Mystery

The Forex Market: Shrouded In Mystery, Controversy and Misconceptions

Just for a moment, think about the last time you took a nice, long well deserved vacation out of the good old USA. If that’s been a while (I’m sorry to hear that), then how about the last business trip that you took out of the country to a location in Europe, Asia, the Middle East or maybe even Australia, mate. Now, chances are that if you planned to be there for over a week you probably exchanged some of your US greenbacks for the local currency either before you left, or soon after your arrival.

If so, you unknowingly were a participant in what most believe is the world’s largest, (by volume) investment market, Forex.

So what is Forex? Well, Forex or FX as it’s also known is short for FOReign EXchange. Forex, as mentioned earlier is by most standards the largest trading marketing the world with nearly $4 Trillion a day in transaction volume. To put that into prospective, it’s about 5 times the average daily volume of ALL the equity markets in the US combined. Bottom line..it’s huge!

The Forex market is also unique in that it is pretty much a completely electronic, internet and computer based market with no real central trading “floor” or central hub. While the major trading centers are London, Tokyo and New York, trading actually flows continuously around the world through the global “interbank” system which connects the world’s major banks and large institutional trading firms. This system allows huge multi-national corporations, large trading firms and institutional investor’s access to the global currency market on a 24 hr a day, 5 ½ days per week basis. In addition, since the 1980’s, with the increase in technology, computer speed and memory, and the spread of the internet, the Forex market has been made accessible to the individual investor as well. Now, any investor with a PC or laptop can have access to and trade the Forex market on virtually the same level as the big institutional guys! This access I believe is just one of the reasons for the huge growth spurt in Forex over the last 6 years from about $1.9 trillion a day in volume to an average of $4 trillion in volume today.

Profits are made (or money lost), in the Forex market in the same way as money is made or lost on the currency exchange for your out of the country vacation. Let me explain. If, when you exchanged your US dollars for, let’s say Euro’s, it took $1.35 USD to get $1 Euro. Now, when you exchanged your Euro’s back into US Dollars you received $1.40 USD for each $1 Euro, you in essence made $.05 more in the exchange. Now scale that up to a $10K or $100K transaction, with a much faster turn around time and you can get a good idea of the Forex markets trading action.

For the most part, in my opinion most of the mystery, controversy and misconception swirling around the Forex market have evolved from “word of mouth” by those who really don’t know or understand the market. This misinformation through my experience starts with someone asking a friend, relative or associate, who is an “investor”, yet knows little or nothing about Forex except what they overheard on the radio or at the water cooler at work, for advice. Another source is the “professionals” in the investment arena who basically push stocks, bonds, annuities and mutual funds and also generally have little or no knowledge about Forex. In this instance, there is usually no incentive (financially) to tell those inquiring about Forex anything other than “it’s too risky” or “it doesn’t fit with your investment style”. This usually ends the inquiry and the funds stay comfortably under the management of the “professional” who, since you brought it up, will “help“ you re-allocate your portfolio, among his offerings, of course.. After all, that’s the money manager’s bread & butter…fees on funds under management. About here is where my mini risk disclosure should be trotted out. Yes, there is risk involved in Forex investing and you can lose money. Just like ALL investments!

The decision to invest in Forex should, in my opinion, be made by investors the same way all their other investment decisions are made. Consult with those who specialize in Forex. Then do the due diligence needed to verify the information. Then the savvy investor can make an informed decision based on facts, figures and logic. The way ALL investment decisions should be made.