Forex Trading: The Basics of Forex Trading

Forex Trading has taken the world by storm. Not only do large institutions like corporations, banks, and governments participate, individual investors also have the opportunity to profit from it.

Forex trading is one more method of operating in financial markets. Rather than buying and selling stocks, bonds, and other financial instruments, the investor buys and sells currencies of various nations.

The value of each nation's currency relative to other currencies is constantly in flux. This is where the profit opportunities exist: in predicting the change in value of one currency relative to another, and taking appropriate action.

Trading is therefore done with "currency pairs".

Here's an example of how this might work in practice:

On January 20, a forex trader decides to 15,000 Euros with U.S. Dollars, at the exchange rate current at that time. At some point in the future, months, days, or even hours later, she sells the Euros and gets dollars in return. If the trader did her homework and traded at the right time, she will make a profit.

Currency pair trades are expressed in terms of the currencies' abbreviations, with the "base" currency displayed first. For example, if you were buying Great British Pounds with U.S. Dollars, the transaction would be shown as GBP/USD.

As with any new endeavor, forex has terminology with which you should familiarize yourself.

Currency rate: this refers to the exchange rate of one currency relative to another.

Ask price: the price required to purchase any given currency.

Bid price: what prospective buyers are willing to pay for any given currency.

Pip: stands for "percentage in point". Sometimes expressed simply as "point". A pip is the smallest price movement of a currency.

Spread: the difference between the ask price and bid price. For the trader, this is the cost of doing a trade.

To trade forex, you must find a forex broker. In making your selection, consider such factors as minimum deposit, whether a demo is offered, and whether they accept a credit card funding source.

Many brokers offer web-based research and analysis tools. You can make use of them but do your own due diligence too: be aware of news and market changes that may affect you.

There are many factors that affect the value of currencies, including interest rates, GDP (gross domestic product) figures, and the Consumer Price Index (CPI). Over time, you will find the metrics or measurements that make the most sense to you and focus on those.

Forex can be an ideal business for you if you are willing to learn how to do it right. Just like any business, there is a learning curve and risks to avoid, and the potential for success is great.