Learning Forex
Learning the basics of Forex is fairly simple. Learning to trade currencies on the Forex market effectively enough to make money is a challenge. Forex is short for "foreign exchange," which is the conversion of one monetary currency into another. Growth in the availability of Internet trading platforms in the 21st century has contributed to Forex becoming easily the most liquid and highest-volume speculative market in the world.
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The Market
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Over $4 trillion in currencies exchange hands every day on the Forex markets, which operate 24 hours a day thanks to a global marketplace where traders are connected to major exchanges throughout the world. The only pause in active trading is from the late-afternoon close of New York on Friday to the open in Asian markets late Sunday afternoon.
Currency Pairs
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Unlike equity markets where you typically pay a market price for the purchase of a stock, Forex trading takes place through currency pairs. You buy or sell one currency relative to its position against another. The most commonly traded currency pairs are EUR/USD, GBP/USD, USD/JPY, USD/CHF, EUR/JPY, USD/CHF, EUR/GBP and USD/CAD. Each currency is noted by a three-letter trading code. EUR is the euro, GBP is the British pound, USD is the US dollar, JPY is the Japanese yen, CHF is the Swiss franc and CAD the is Canadian dollar.
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Long or Short
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When you trade in Forex, you are essentially indicating what direction you think a currency pair is going to move. For example, assume the early-morning price for the EUR/USD is 1.36822. The first currency listed is known as the base currency, while the second is known as the quote currency. Thus, one euro is worth $1.36822 in this example. If you believe the euro will increase in value relative to the dollar, you would buy, or go long, on this pair. If you believe the euro will drop relative to the dollar, you would sell, or short, this pair.
Risks and Rewards
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Because of its high liquidity and perpetual price movement, Forex is also known as a high-risk, high-reward trading market. Investors who are disciplined, strategic and well-researched can make good money over time through short-term trading or long-term investing. Many people lose significant money in Forex, however. Risks are such that trading sites and other content regarding Forex trading typically include the disclosure "Forex trading involves significant risk of loss and is not suitable for all investors."
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References
- Photo Credit Euros, twenty and fifty image by Warren Millar from Fotolia.com
