The investor's goal in Forex trading is to profit from foreign currency
movements. Forex trading or currency trading is always done in currency
pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was
1.0857. This number is also referred to as a "Forex rate" or just
"rate" for short. If the investor had bought 1000 euros on that date,
he would have paid 1085.70 U.S. dollars. One year later, the Forex rate
was 1.2083, which means that the value of the euro (the numerator of
the EUR/USD ratio) increased in relation to the U.S. dollar. The
investor could now sell the 1000 euros in order to receive 1208.30
dollars. Therefore, the investor would have USD 122.60 more than what
he had started one year earlier. However, to know if the investor made
a good investment, one needs to compare this investment option to
alternative investments. At the very minimum, the return on investment
(ROI) should be compared to the return on a "risk-free" investment. One
example of a risk-free investment is long-term U.S. government bonds
since there is practically no chance for a default, i.e. the U.S.
government going bankrupt or being unable or unwilling to pay its debt
obligation.
When trading currencies, trade only when you expect the currency
you are buying to increase in value relative to the currency you are
selling. If the currency you are buying does increase in value, you
must sell back the other currency in order to lock in a profit. An open
trade (also called an open position) is a trade in which a trader has
bought or sold a particular currency pair and has not yet sold or
bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX
market is speculative. In other words, the person or institution that
bought or sold the currency has no plan to actually take delivery of
the currency in the end; rather, they were solely speculating on the
movement of that particular currency.