Introduction to Forex Trading

The Foreign Exchange market, commonly referred to as forex, is by far the largest financial market in the world. Forex varies from the traditional idea of a market. Instead of buying and selling the ownership in something, such as a stock, forex traders buy and sell money.

When traveling out of the country, you need to convert your current money into a different type of currency. This is called exchanging your currency. Using an exchange rate, money is converted. For example, you may receive 8.27 Euros for 10 USD. Now, if you didn't need to spend that money, you can convert it back to USD. Two weeks later, you may find that your 8.27 Euros is now worth 11.3786 USD. You made over a dollar while on vacation.

This is how forex basically works. Of course, the foreign exchange market operates on a much larger scale, with trillions of dollars traded on a daily basis. Instead of actually walking into a bank to make an exchange, currency is bought and sold through the interbank market with the assistance of a broker or market maker.

Exchanges are made on the basis of pairs. The most popular currency pairs are:

• EUR/USD, the Euro
• GBP/USD, the Pound
• USD/CAD, the Canadian dollar
• USD/JPY, the Yen
• CHF/USD, the Swiss franc
• AUD/USD, the Australian dollar.

These pairs make up the majority of trades made in forex. The first currency in the pair is the base currency, while the second currency is known as the terms currency. When you purchase one currency, the other in the pair is sold. When you sell one, the other is bought.

To trade in forex, a trader will simply go long (buy) and go short (sell). The spread is the cost of trading. The sell quote, or bid price, is found in the first number in a quote. For example if the EUR/USD quotes 1.245/03, you can sell the Euro at 1.2450 USD. The buy quote is established by using the number on the right. This shows the spread between the sell and the buy. For example, 1.245/03 has a spread of 3 pips. The pip is the smallest price increment possible for a currency. With a spread of 3 pips, the currency pair has a buy of 1.2453.

The pip value is fixed on many pairs, but can be variable. EUR/USD pip values are always fixed, with $10 for standard lots, $1 for mini-lots and $0.10 for micro lots. If trading in standard lots, you are dealing in terms of 100,000 units of the base currency. Mini markets offer the ability to trade in lot sizes of 10,000 units, while micro markets allow a lot size of 1,000 units. Mini and micro accounts offer new forex traders the ability to learn through active trading with a smaller dollar amount at stake.

Many forex traders operate on the margin. The margin is basically the deposit amount required to open or maintain a position. For example, a trader deposits $1,000 in his account, which has a 1% free margin to open. He can then buy or sell positions up to $100,000. The leverage ratio is 100:1. If the account balance falls below the pre-set used margin on the account, he will receive a margin call. This call requires him to either add money or close the position. The used margin is often 50% of the free margin. By increasing the leverage on a forex account, the trader increases the possibility for gains. However, the loss is also intensified.

Traders operate under many different trading styles, including trend trading, range trading, scalping and position trading. No matter the trading style, all traders depend on two types of analysis: technical and fundamental. Technical analysis uses forex charts to determine the pattern of ups and downs for a currency pair. Fundamental analysis focuses on the economic, political and economic factors that determine the movement displayed on the charts. The ability to read and understand forex charts is essential to learning to trade forex.

There are many types and styles of forex charts that are utilized by forex analysts. The three most commonly used charts are line charts, bar charts and candlestick charts.

Line charts show the increase and decrease of finishing prices over a set amount of time. Line charts help to identify the overall cyclical progress of a currency pair.

Bar charts present the finishing prices with the opening prices, showing the highs and lows of a currency pair. Candlestick charts also show this information, but in an arrangement that allows traders to identify different patterns that indicate the direction of a currency pair. The reading of candlesticks is considered an essential skill for technical analysts.

Forex trading allows traders to take advantage of the global economy. While highly speculative, forex can be easily learned through first learning to read the charts and identify patterns. Add fundamental analysis and traders are able to accurately time the market and make a profit.