Forex Basics

Welcome to the Wild Wild West of Trading... The Forex Market. The Foreign Exchange market, also known as the Forex Market is the largest, most liquid, most unregulated market in the world. Fortunes can and are made and lost in this market. However, it is also a very quick moving and fast paced market, so traders must be aware of what is going on at all times. Only practice and experience in trading this market will allow you to fully understand the financial potential that exists here.

What is the Forex Market?

Forex and FX are both abbreviations of foreign exchange. It can also be called currency market, currency trading market, foreign exchange market e.t.c. All of these terms refer to the same international market where money or currencies are traded or exchanged.

The foreign exchanged market is not located in a particular place. Virtually all countries of the world is involved in currency trading therefore the possibility of trading currencies in most countries is high. There are so many reasons for the popularity of forex trading, but top among these reasons are the availability of leverage, high liquidity, 24 hours trading day and the low cost needed to begin trading

When did Forex Start?

The foreign exchange trading market is a surprisinly recent phenomenon. Until the 1970's currencies were stable relative to one another since the 2nd world war. But then came what was known as the "gold standard" which gave every single currency of the world a value relative to the US dollar. This system was introduced in order to maintain a stable economy in the world.

However, in the early 1970's the United stated dumped the gold standard and the value of so many currencies began to change. Banks and institutions began to trade currencies, buying low and selling high, instead of making exchanges when the need to transfer money from one country to another arises.

The value of a currency is directly tied to the value of the home nation's economy. This therefore means if a nation is success or her economy is stable the value of it currency goes up and vice versa. These fluctuations can be great and can happen in a very short time. The amount of money involved can be great too. The amount of foreign currencies that is traded crosses $3.2 trillion daily. The 3.2 trillion USD daily turnover is bigger than the combined turnover of all the world's stock and bond markets.

Who is in the market?

The most influential group is the major banks. Second, other hedge funds and other investment firms. Third is the central banks, as well as companies who convert their funds to foreign currencies. Finally, there is you, the retail Forex trader. The nice thing is, you'll never have to worry about market manipulation, there is just too much money and too many players for any one entity to manipulate the Forex market.

What moves the Forex markets?

Both fundamental and technical factors both move Forex market. Fundamental factors include the country's interest rates, inflation, GDP growth, employment, trade balance, as well as a few other factors I will discuss in a later lesson. Basically, if demand for a currency increases then that currency will gain value with respect to other currencies. Technical analysis is also very important, although many believe it to be a self fulfilling indicator. Meaning, so many people follow and trade technical charts that the indicators become true. Many institutions use technical indicators to make trading decisions, so we must as well.

The Major Currency Pairs

Euro/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD

Introduction to Trading

Choosing Your Forex Broker

I'm not going to walk you through your interface of your trading platform, but I will give you general concepts and trades to execute. You just have to learn where your tools are. Find out where you make your order, find out where your streaming quotes are, find out where your current orders are, find out how to turn on and off technical indicator filters on the charts. Find out where your profit loss indicators are. These are the basic things you'll need to begin trading.

You need to trade every single day, only one currency, so pick it and stick with it. Watch your currency move, you don't always have to trade it, but you should recognize its patterns and movements. You will learn more in one week of actual trading, then you will three months of studying theory. Seeing the theory in practice helps you to remember and understand it so much better. If you want a real challenge, try explaining the Forex Market to a friend.  When you can successfully understand a concept well enough to explain it to someone else so they can understand, you will have mastered that concept. Then once you understand the basics, and you develop your own style, you can start to get some really in-depth knowledge.

Trade size

A standard size is known as a lot, and these are worth 100,000 units of currency. You can also get mini lots which are 10,000 units and micro lots which are 1000 units. If you're saying wait, I can't afford 100,000 units of the euro, that's where leverage comes in. Leverage is how we make money in the Forex market. It is incredibly useful, but also incredibly risky. Common leverage ratios go from 50 to 1 all the way to 400 to 1. Example, a standard lot of hundred thousand units can be traded with only 250 in the account with maximum leverage. This will greatly increase the amount of money you gain or lose per Pip.

What is a Pip?

A Pip is the smallest unit of price movement in a currency pair. These are roughly equivalent to a tick in the stock market. A Pip is normally the change in the fourth decimal will place of each currency, however, Normally the Pip is the most obvious number on your trading platform. So you don't really have to worry which decimal place it is.

Why is there a difference between the buy and sell price?

Stop Losses

Stop losses and trailing stop losses are absolutely vital to any trader. You should be using these on any trade you make. Trailing stop losses are really nice for getting maximum profit without giving it all back. These stop losses follow the price of the currency up or down adjusting as increases or decreases in value. So you could put a trailing stoploss at ten pips, and when the currency stops moving upwards and begins to retrace you only lose ten pips before selling out of your position.

Regular stop losses are the hallmark of a great trader. A winning trader places good and tight stop losses at logical points which minimize risk and maximize potential gain. You absolutely must place a stop loss on every trade you make.