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Forex Trading
Basics
Every day the popularity of Forex trading seems to increase.
You've probably heard friends or co-workers talk about it, but
do you know what Forex Trading is? More importantly is it
possible to make money from trading currencies if you are not an
expert trader? This article will introduce you to some of the
basics of forex trading.
To begin with the term 'forex' is short for "foreign exchange".
Forex trading is simply trading foreign currencies based on
their exchange rates.
Forex trading is also called "currency trading" or "FX". Many
people are suprised at how big the forex markets are, because it
doesn't get nearly as much attention as the stock market,
options and commodities do. However, it is the biggest market in
the world with over $2.5 trillion being traded on a
daily basis. As such, the foreign exchange market also
offers investors a huge opportunity for profits.
When you trade on the foreign exchange, you do not trade stocks
or bonds. You trade foreign currencies. Basically, forex trading
involves buying one currency and selling another. As exchange
rates fluctuate, you make money or lose money (very similar to
how stock prices fluctuate).
With forex trading, you don't invest in a single company or
group of companies as you do with stocks. Instead, you are
investing in a country or maybe more specifically the economy of
that country. You are making assumptions on one nation's
economic health versus that of another.
For example, let us say that you are comparing the Japanese yen
and the US dollar. Your research seems to tell you that the US
dollar is undervalued and will soon rise in price;
simultaneously, you expect the Japanese yen will lose some
value. In that case, you would execute a trade to buy US dollars
and sell Japanese yen. If you are correct, the exchange rate
will go up and you will profit from your analysis.
Even though this sounds easy, though, it is not. In fact,
currency prices can be very difficult to predict, because so
many things can cause a change in exchange rates. You also have
to remember that with currency trading, you trade in pairs.
Therefore, you buy one currency while you sell another.
Therefore, you won't just look at one nation's economy, but you
will be comparing two.
Of course, you do not have to limit yourself to just the US
dollar and the Japanese yen, for example. There are many dozens
of different currencies to choose from, with seven major ones.
Therefore, if you are just starting out, I would recommend that
you stick to the seven major currencies. They are as follows:
USD - US Dollar
EUR - the Euro
GBP - British Pound
JPY - Japanese Yen
CHF - Swiss Franc
AUD - Australian Dollar
CAD - Canadian Dollar
Most investors (especially beginners) tend to concentrate on the
major currency pairs. However, the forex markets offer you the
opportunity to trade in essentially every national currency. |