Forex Trading 101

By June Campbell

You've heard the term Forex Trading. If you are like many of us, you realized it was something to do with investing and making money, but your understanding may not have extended very much beyond that point. You may have wondered what, exactly, it is and whether it's really just another way of gambling away your funds. Can you get rich quickly from Forex or is that another pipe dream fed to us by those who promote such things?

This article will explain the basic concepts of Forex trading.

It's about Foreign Currencies

To the typical tourist, a foreign currency is one that we encounter when we visit another country. If you go from the US to Canada, for example, you will encounter a currency known as a dollar in both countries - but the Canadian dollar usually has a different value than the US dollar.

Depending on the state of the world market on that day, the US dollar may be worth more than the Canadian dollar, or less, or both may be the same. It you visit again a few weeks or months down the road, the situation might have changed.

If you go to another country - the UK, Mexico, Panama, Kenya - you will encounter a different currency in each country, and the value will fluctuate regularly if not daily.

It almost feels as if an invisible puppeteer is manipulating the currency values.

The Global Forex Market

Undoubtedly you are familiar with the concept of the stock market, in which shares of public companies are traded. Similarly, you have probably heard of commodity trading, which involves trading in commodities such as oil, sugar or gold.

However, the biggest financial marketing on this planet is Forex. More than three trillion dollars is traded every single day on this market.

Currency Pairs and Majors

Forex trading differs from the stock markets and the commodities markets in a significant way. When you are trading in the stock market, for example, you purchase a share, or a number of shares, of a publicly traded company in exchange for your money, and in the commodity market, you purchase commodities.

However, when trading in the Forex market, you sell one currency and buy another. It's the same basic concept as visiting a foreign country and trading in your currency for that of the other country's.

Since you are always dealing with two currencies, the currencies are known as currency pairs. Certain currency pairs generate more trades than other currencies. These prominent currencies are called the majors. At this time, the majors are EURUSD, GBPUSD and USDJPY.

The advantages to trading in the majors are that it is always easy to find other people to trade with and you will pay a low transaction fee.

Why Does the Forex Market Fluctuate?

Many, many factors can impact the Forex market and affect the buying and selling prices. For example, currency rates will always change should a war break out. Elections can have similar effects, as does the release of economic data.

In theory, over a very long period of time, you expect currencies to move up and down in synch with the relative economic strength between the two countries that comprise the currency pairs.

In the short term, this is not so. In the short term, there often appears to be no rhyme or reason behind a currency's fluctuation. The movement is unpredictable and chaotic, which is known as volatile. This haphazard change can be a reaction to factors such as data releases, rumors and the combined interaction of many traders who are active on the market that particular day.

How to Make Money from Forex

Forex traders are trading for different reasons. Some are attempting to reduce their currency risk. They may operate a company in one country but generate income that arrives in other currencies. They may even pay expenses in another currency. Therefore, its a good business strategy to buy and sell currency pairs.

These traders comprise the minority of traders, however. Most of the players are there hoping to make money. They are purely speculators. Like any other type of market, they attempt to foresee which direction the market will go and make money by trading before the change happens.

For example, a player might anticipate that the Euro is going to increase in value. He or she might then buy an amount of Euros before this change happens. If and when the Euro gains value, the trader then sells those Euros and makes a profit. If the Euro does not gain value, he will seek another strategy or perhaps take a loss.

It's rare to make a profit with Forex when you first begin trading. Most people will spend several months or perhaps even years getting a feel for how the market works before they start to generate profits.

The reason for the delay is often because Forex traders start out trading on their instincts or hunches instead of using rational, factual analyses. This can be a costly and cruel lesson. Fortunes can be lost.

On the other hand, traders with a different attitude - one that involves learning the right way - may avoid a financial catastrophe. By educating themselves from the start, they shorten the learning curve and move into profit mode much faster. Guides and tutorials are availble.

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