Understanding the Basics of Forex Trading

Are you interested in foreign exchange trading? Start with understanding the basics of the currency trading market, what it is and how it works.

There are a number of different terms used for the currency trading market, most commonly referred to as the foreign exchange market or forex, sometimes shorted further to fx. They all describe the international market which is found in the financial centers all over the world where currencies are sold and traded. It is one of the largest financial markets in the world with the daily volume of trades in the trillions of dollars.

Foreign exchange trading began in the 1970s when the gold standard ceased to be used. Before then, every currency in world trade had a set value against the US dollar. With the abandonment of the gold standard, currency values began to fluctuate, creating a market where profits could be made by trading the different currencies.

Like in the stock market buying and selling company stocks, the idea is to buy low and sell high. But instead of investing in the value of a product or business, it's investing in the value of one country against another. If a country is doing well, its currency value will be high. If it isn't, currency value falls.

Because currency prices can only fluctuate relative to another currency, they are traded in pairs, buying one currency and selling another. For example, a common currency pair is the EUR/USD, or the price of US dollars quoted in euros. If you think the USD will rise against the value of the EUR, then you would sell your EUR and buy USD. If you're correct, you make a profit depending on how much the value rose and how much you invested. If you're wrong, you lose. It is a zero sum game.

What makes the foreign exchange market unique is its extreme liquidity, its huge trading volumes, the ability to trade 24 hours a day (except UTC Sunday), the variety of factors that affect exchange rates and the use of leverage. The margins of profits are low compared to other markets, but profits can be high due to the large volumes of trade.

Most of the foreign exchange market is dominated by the inter-bank market, consisting of the largest investment banking firms. Some of the trading is done for the banking customers but most trading is for the banks' own accounts. Until the rise of the internet, there was little opportunity for individuals to participate in this profitable market. Now, increasing numbers of people are able to use their home computers to trade using an online brokerage account.

Most brokerage firms offer demo accounts where customers can trade dummy, or fake, money under actual market conditions so that you can start to get first-hand experience right away without risk. Once you feel confident, you can set up a mini account for a small investment of as little as $10 to further test your trading skills

Another resource useful for new traders is forex algorithmic software or a robot forex trading system which will monitor and analyze real time market data 24 hours a day and execute trades for you automatically. The automated systems help you see profits quickly as well as speed your learning as you watch it analyze and trade throughout all market conditions.

Because it takes little knowledge of foreign currency trading knowledge to make and sustain a profitable campaign using one of these trading systems, it is recommended for beginners. It is also useful for experienced traders to help monitor and manage numerous campaigns.