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You have to walk before you can run.
The same applies to the Forex.

This website is all about Forex trading. For those of you who are just now discovering the exciting world of currency exchange, some Forex basics would be beneficial. Here you will find all sorts of articles, tutorials and other resources to learn all about forex basics for free.

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1. What is Forex Trading?

What exactly is Forex Trading? Quite simply, it is the trading of one world currency with another on the world market.

Not sure what that means?

Well, for purposes of illustration, lets talk about a market that most people are familiar with - the stock market. The stock market is the exchange or place where people come together to buy and sell shares in companies. If one wants to buy, say, 1000 shares of Microsoft stock, he does so by paying money for shares. This is done on on a trading exchange known as the NASDAQ. Why do you buy Microsoft stock? Obviously, because you feel strongly that Microsoft is a strong company and that it will increase in value.

But what if you wanted to trade one world currency for another instead? Why would you want to do that? For the same reason that you wanted to buy Microsoft stock. Because you think the price of one world currency will increase in value.

If you feel that the Euro is going to appreciate in value, you might want to buy Euro in exchange for your US dollars. Where would you do that? On the Forex market, of course. Yes, the same way there is an exchange or market where we can come and trade Microsoft stock, there is a market where we can trade world currencies for one another. This is what Forex trading is all about.

2. What is the Foreign Exchange Market?

This market where buyers and sellers of world currencies come together to trade is referred to as the foreign exchange market. It is referred to by many names such as the Forex, the FX market, the spot Forex market and several others. Unlike the NASDAQ, the New York Stock Exchange, or the Toronto Stock exchange, the Forex market is not a physical place where buyers and sellers come together. Instead it is a worldwide network of banks and financial institutions that come together in an over-the-counter or interbank market. It is not centralized in any one physical exchange.

While we may think of the New York Stock Exchange or similar exchanges as being very large marketplaces, they are dwarfed by the size of the Forex market. Some estimates suggest the daily volume on the Forex to be as high as US$5 trillion per day. The New York Stock Exchange trades approximately 1/100 of this amount per day. Huge isn't it?

3. Why Trade Forex?

The Forex is one of the most exciting marketplaces to trade. Never before has there been a more accessible and easily understood marketplace as the Forex. People from all walks of like are discovering this huge marketplace and a great many are literally transforming their lives and securing financial independence trading currencies. From ease of entry to huge liquidity, there are a number of powerful reasons why the Forex represents the market of choice for traders.

4. Understanding Forex Quotes

Currencies are traded in pairs. When you deal with stock quotes, you are quoted a price for shares in that stock. By prices, we mean how many US dollars will be needed to buy one share of Microsoft stock. In contrast, with currencies, there are always two associated currencies being traded. For instance, if we wanted to exchange US dollars for Euros, we would trade the EUR/USD currency pair. If we buy this pair, we are essentially buying Euros and selling USD. If we sell this pair, we are essentially buying USD and selling Euros. The first currency listed in the pair is called the base currency. The second currency listed in the pair is called the counter or quote currency.

5. Forex Market Driving Forces

What causes the market to move? What forces shape the direction of a particular currency pair?

In a nutshell, currencies move because of changes in investor sentiment. If investors feel positively about a particular nation and its currency, it will appreciate in value and its price will increase relative to other currencies. If investors feel that the country's currency is weakening, it will depreciate relative to other currencies.

So this leads to the question, what causes us to feel strongly or negatively about a particular currency? The answer is fundamentally a simple one. We base our estimation of the value of a currency based upon the strength of that nation's economy. If we feel that the economy is improving, so will the value of its currency. If we feel that the economy is stagnating, we expect its currency to stagnate as well.

Ok, so the next question becomes, what forces shape our valuation of country's economy? The answer to this question is quite involved, but a basic summary is that market forces shape our sentiment of a particular currency. These include:

Economic Data

Interest Rates

Government Intervention

Inflation

Jobs Outlook

News events

Changes in any of the above, among other factors, can have anything from a modest effect to a profound effect on the price of a currency pair.

6. Ways to Trade Forex

There are many ways to trade Forex. Most people begin by learning Forex basics and then experimenting with their own discretionary based trading methodology. Some achieve great results this way. Most do not. Others rely on third party tools and techniques for their trading decisions.

Some of the most popular ways to trade Forex are:

Your own discretionary system

Rules based trading systems that eliminate discretionary decisions

Trading room approaches where investors get together to identify and execute trade setups together

Automated Forex systems which use expert advisors that automatically enter trades for you

Forex signals provided by third parties that give you entry and exit recommendations that you enter manually

Managed accounts where one gives an advisor his money to trade for him

There are both advantages and disadvantages of each of these techniques.

7. Fundamental v. Technical Analysis

As far as methods of analyzing the market is concerned, there are two schools of thought. Fundamental Analysis suggests that the only way to gauge the direction of the market is to understand the purely economic forces that shape the underlying currency. Fundamental analysts try to determine whether price will go up or down based on the strength of the economy, interest rates, inflation, etc.

Technical analysis study price charts to try to identify predictable price patterns and trade setups. Their theory is that the past behaviour of a currency pair gives us a good indication as to how it will behave in the future.

Although there are purists that focus exclusively on one or the other method, most successful traders blend the two approaches together to some extent.

8. Forex Glossary

Forex trading has its own unique lingo. One of the challenges of learning to trade the Forex is to get a grip on the terminology that traders use. You can't trade currencies if you don't know what a PIP is, what it means to "go long" or how to "square out" on a position. Confused? Don't worry, there are lots of resources available to get you quickly up to speed and speaking like a seasoned pro.

9. Forex Tutorials

One of the best sources of information to get you up to speed on Forex basics is with some short informative tutorials. Rather than jumping into a complete and involved trading course, these short tutorials will give you a quick understanding of key concepts so that you can begin to experiment with Forex Trading. There are many different resources available for you, from short free tutorials to more involved premium video tutorials.

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