Foreign Exchange (Forex)

Begin your Forex education here:

Introduction of Forex:

It’s helpful to compare Foreign Exchange (Forex) trading to investing in the stock market: you don’t have to invest a lot of money to trade currencies, at least not any more. With rise of the Internet, little guys like us can trade currency much the same way that we can invest small amounts of money in the stockmarket.
Although it may seem quite complicated – and there are a lot of factors that enter into trading currencies – you can easily get started and slowly feel your way along. Then, as you get more experience, you can then spread your wings a little.

The size of the market:

One thing you should realize from the beginning: currency trading may well be the most exciting field of investing that currently exists. The amount of currency traded daily worldwide exceeds US$4 TRILLION – compared to just $25 billion dollars’ worth of daily trades on the NY Stock Exchange. 

How to make money in Forex:

Forex trading is based on the strength of various currencies in relation to each other, or their relative worth. For example, it might take 1.400 US Dollars to buy one Euro. This is the exchange rate and all major and almost every other currency have published exchange rates. Here’s the interesting part, though, and where the opportunity to make money lies. These rates fluctuate all the time, usually by very small amounts. That means that if you buy 1,000 Euros for 1,400 dollars (the above exchange rate) and the exchange rate then changes to 1.420 dollars to buy 1 Euro, you can sell your Euros back for 1.420 dollars, realizing a profit of $20.
Now that’s not a huge amount of money, but if you are working with more than a thousand dollars you can do very well for yourself because you can make as many trades as you want whenever you want. Forex is a 24-hour, 7-day a week market.
But before you rush into trading with dreams of making millions you need to learn the basics and then start out cautiously. But there’s no reason why you can’t make money in this exciting, fast-moving market.
Keep reading and learning, and soon you’ll be ready to start.

Trading – a Top Line View:

Let’s look at some of the terminology that is used in Forex trading. The basis for all trades is the fact that the prices of currency are always listed in pairs. For example, the British Pound and the American dollar would be portrayed as GBP/USD – 1.7500. To buy the base currency (in this case the British Pound) you would need to pay $1.75 of the quote currency (in this case the US Dollar). The base currency is always listed first and the quote currency is listed second.
It is possible to trade most currencies in the world but the most frequently traded currencies are:

Forex symbols are always three characters where the first two letters identify the country and the third identifies the currency. Involved in 86% of trades, the US Dollar is the most traded currency, followed by the Euro at 37% and the Japanese Yen at 16.5%. 

The basic premise of Forex trading:

The basic premise behind a Forex trade is the trader’s expectation that one currency will weaken or strengthen in relation to another. In the above example we saw a ratio of 1/1.7500 between the GBP and the USD. What a trader will do is either buy or sell GBPs or USDs based upon his expectation of what the currencies will do in the future. And remember, with the speed at which you can make trades and the ease with which you can do it, the word future can mean a lot of things from mere minutes to days or longer. So, if the trader thinks that the American economy is weakening and the USD will weaken against the GBP he would sell USDs and buy GBPs. If the USD does, in fact, weaken then he can sell his GBPs back into USDs for more than he paid for them and realize a profit.
Forex trading is really no more complicated than this. What can get complicated is the degree to which analysis by traders is done to try to determine which way the currencies will go. This is where things get really interesting and this is something I’ll be covering in my continuing series of articles on the exciting and potentially lucrative world of Forex trading.

Some Advantages of Forex Trading:

Let’s look at some of the advantages of Forex trading have made it the most popular form of global investing for both small and large players.

Trade whenever you want – almost 24/5:

First, it is important to understand that Forex trades can be made at almost any hour of any day, with a few gaps over the weekend between market openings. What does this mean for the trader? Well, it’s just one of the advantages that Forex trading has over other forms of trading. You have much more control over when you can trade and since the Forex market can be so volatile being able to make trades whenever you want is extremely important.

You can see below the opening hours of the most important Forex trading markets in the world.
Time Zone Australia (AEST)

No need to rely on a broker:

Another factor that gives you control is the fact that you don’t need to use a broker. You trade directly through a software platform provided by a brokerage firm. You make the trades yourself based on your own interpretation of the market and not advice from a broker who may have ulterior motives for giving that advice. For example, in the stock market many brokers provide advice on stocks based on their own agenda. This is one of the reasons that many people have moved to Forex trading from the stock market – they simply became mistrustful of taking advice from brokers.

Trade through a reputable firm:

Although you don’t need a broker to make trades you do need a company to set you up to trade and here it is very important that you choose a reputable firm to deal with. Basically, the firm’s involvement is as follows. You will set up an account with a Forex firm and deposit some money. The firm will provide you with a software program that will allow you to make trades. The more reputable firms will provide on their websites information like this, to help their clients learn as much as they can about Forex trading. After you are set up to trade, however, you do not need to make your trades through a broker – you control your own trading.

Ensuring your funds remains safe:

To ensure that your funds are 100% safe at all times, you should choose a Forex company that is regulated by a government banking system. Many Forex companies, even some of the largest in the world, are unregulated and based in countries that have loosely regulated banking systems. This is potentially worrisome so it is best to stick to regulated Forex firms based in countries like the U.S.

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