Forex or Foreign Exchange trading has a number of advantages over stock market (share) trading, and this is why more and more people are learning about the Foreign Exchange Market and trading Forex for profit. Greater flexibility in trading and operating are just some of the key benefits available.

1. There are no broker commissions as such. Forex dealers earn their income from the “spread” (the difference) between the buying and selling prices. This is usually a fraction of one percent of the relevant trade.

2. The Forex market is open twenty-four hours, five days per week. Unlike share trading you can trade any time you want. The Forex market is open continuously from 0:00 AM GMT Monday to 10:00 PM GMT (5:00 PM EST) Friday.

3. It is difficult for individuals or even companies to artificially influence the Forex market. This is because the sheer volume of daily trading is so large. (However, some corrupt individuals can influence the value of shares. An example would be sending out millions of emails, stating that shares in a particular company are about to increase sharply and encouraging recipients to buy them.)

4. You can trade the Forex using borrowed capital. This is called Margin Trading. Margin trading is where you use between 0.5 and 4 percent of your own money to control a much larger amount of borrowed money. This enables you to leverage your investment. The Forex is traded in lots, a standard lot is $100,000, Some dealers allow you to trade in smaller lots, called Mini- and Micro- lots.

In order to understand how Forex trades work it is easiest to look at some long-term currency changes.

The following list shows the relation between the U.S. Dollar (USD) and UK Pound (GBP) on November 30th for the years 2004 through 2006.

• Year USD GBP
  2004 1.91 1.00
  2005 1.73 1.00
  2006 1.97 1.00

Suppose you purchased 1,000 UK pounds (GBP), on November 30th, 2005 using U.S. Dollars. Your 1,000 GBP would have cost you $1,730. Now suppose you held on to your 1,000 GBP for exactly one year. And on November 30th, 2006 you sold your 1,000 GBP in exchange for U.S. dollars (i.e. you bought 1,000 GBP worth of U.S. dollars.) You would receive $1,9700. In other words you would have earned $240 on the trade, that is a return of 13.8 percent on your investment.

Now 13.8 percent per year will not make you rich, but it is a whole lot better than the return on most “safe” investments.

However, if you had made your purchase of 1,000 GBP on November 30th, 2004, your 1,000 GBP would have cost you $1,910. If you had then sold your 1,000 GBP on November 30th, 2005, you would have received only $1,730. That is to say, you would have lost $180, i.e. you would have a net loss of 9.4 percent on the trade.

The above example shows how you can make a profit in Forex currency trading. That is you buy a foreign currency at one price, wait until it has increased in value, and then sell your holding of foreign currency. It also illustrates the risk in Forex trading, when the foreign currency that you expect to increase in value, falls in value instead, you make a loss on the trade.

The above example of Forex trading uses long-term currency movements to illustrate the basics of currency trading. When you start trading in the Forex for real, you are not going to hold on to your foreign currency for months or years. The vast majority of Forex trades are completed in a single day, up to 7 days at the most. This is because Forex trading involves very small short-term changes in relative currency values (typically of the order of hundredths of one percent). These short-term changes take place within a few hours.