Here I intend to give you just some of the basic knowledge you will need to give you a better understanding of Forex and how the whole system works.

Once you have an understanding of these few facts the entire subject will be a lot clearer to you, if I have done a good job of explaining that is!

 

Forex is an abbreviation of Foreign Exchange Market. This is the busiest trading platform with well over a trillion dollars being exchanged every day. Plenty there for everybody!

The Foreign Exchange Market is a trading platform where financial institutions, big global banking corporations and financial dealers trade currencies and through the medium of spread betting you and I can rub shoulders with the big boys and place our trades too.

The market is open 24 hours a day Monday to Friday. In the simplest of terms the 3 main regions are open for approximately 8 hours each. Asia covers the first 8 hour period, UK and Europe the second with the USA filling the third.

The way into the Forex market for the little guy is through a tool called spread betting. There are many trading platforms with which we can hold an account, a short and by no means exhaustive list follows:

IG Index

Spread Co

City Trader

ETX Capital

Core Spreads.

Once we have our account we can begin to trade. We trade currency pairs.All of the major world currencies are available but there are really only 7 pairs that are worth getting involved with.

These are:

EUR/USD Euro and US Dollar

USD/CHF US Dollar and Swiss Franc

GBP/USD Great British Pound and US Dollar

USD/JPY US Dollar and Japanese Yen

AUD/USD Australian Dollar and US Dollar

USD/CAD US Dollar and Canadian Dollar

NZD/USD New Zealand Dollar and US Dollar

As you will see the US Dollar is involved in all 7 major currency pairs and indeed is involved in over 85% of all trades at the time of writing. The Japanese Yen is the next most widely traded followed by the Great British Pound.

What we are basically trading is that one currency from the pair will be stronger than the other. We can either trade that the stronger currency will rise or the weaker will fall in price. Don’t worry, I will cover this in far more detail in another article.

Most currencies are quoted to 4 decimal places and each rise is measured as a point or pip. The beauty of using a spread betting platform is that you can get involved in this exciting market at a reasonably low cost.

If you have ever exchanged currencies for a foreign vacation then you will be familiar with the different buying and selling rates. For example, as I write this I could buy US Dollars here in UK for 1.3617 and sell them for 1.951. The difference between these rates is called the spread for trading purposes and is how the trading platforms make their money. The example I have used above is more extreme than with the trading platforms but you get the idea.

There are a couple of ways to analyze the Forex market. These are called Fundamental Analysis and Technical Analysis. Both methods have their merits and drawbacks and it is up to each of us to decide which method best suits our way of working.

In the simplest terms Fundamental Analysis is based on monitoring the latest global news, announcements from banks and governments, eg job figures, potential interest rate rises and changes in policy to name just a few. These are more relevant to traders who trade intra day, short term trades that are completed during trading hours each day where sharp changes in price could wipe out a trade in a very short amount of time. Longer term trades are less affected by these announcements.

Technical Analysis on the other hand is based on the theory that the way that the market behaved in the past is a strong indicator of how it will act in the future. A case of history repeating itself. These past movements are called trends and form recognizable patterns. These can be up trends, down trends or horizontal trends. Once a pattern is seen to be repeating itself then users of Technical Analysis will start to look for opportunities to trade based on what the past patterns revealed.

I think that will do for starters. Hopefully you have gained enough information here to whet your appetite to discover more about the wonderful and exciting world of Forex Trading.