Why Trade Forex?

For those who already know how to trade Forex or are about to learn to trade Forex, the following information may already be known, but allow me to share it anyway for the benefit of those who are new to the foreign exchange market. Keep in mind, Forex is not suitable for all investors so evaluate your risk threshold when deciding to invest.

The Forex is a financial market which specializes in the trading of currencies from around the globe. During any transaction, one currency is bought while another is sold. This trading most often takes place with the help of a broker (or dealer). For the layman, think of trading on the Forex like buying stock in a particular country.

The entire market is run electronically, and there's no central bank. The London market does the largest business, but a number of other markets are also available (New York, Tokyo, etc.). The Forex is open 24 hours a day, as one market is always opening when another one closes. It does shut down over the weekend, however.

In the early days, Forex trading was usually confined to bankers, governments and other large institutions. It cost millions to play the market, but the internet has allowed day traders and others to get involved in the exciting world of the foreign exchange market. These days, all you really need is a few extra dollars (or the currency of your choice) and a high-speed internet connection to get started.

How To Trade Forex

The Forex market is all about the buying and selling of currency from various nations. Ultimately, you'll want to buy a currency you expect to increase in value, while selling a currency you expect to drop in value.

Currency is always sold in pairs. You might see JPY/USD or USD/GBP. You'll also see a number beside each pair, such as GBP/USD = 1.7600. The first currency listed is called the "base currency," while the second currency listed is known as the "counter" or "quote" currency. When learning how to trade Forex, it's crucial that you understand this basic terminology.

The number beside the two types of currency is the exchange rate. This tells you how many units of the quote currency you must spend to buy a unit of the base currency. In the example GBP/USD = 1.7600, you'll need to spend 1.7600 US Dollars to buy one British pound. That's simple enough, isn't it? If you're selling instead of buying, each British pound sold would get you 1.7600 US dollars.

If you're selling, you're hoping that the base currency will fall in value. This is known as taking the "short position." If you're buying, you're hoping for the base currency to rise in value. This is known as taking the "long position" or "going long." So remember: short equals sell and long equals buy. That's one of the key ingredients to learning how to trade Forex.

When you learn to trade Forex, you should also be aware of the bid price, the ask price, and the spread. The bid price is what the dealer is willing to give for the base currency in exchange for the quote currency. The bid price is therefore what you will sell your currency for. When the dealer is looking to sell instead of buy, the ask price is what he's offering in exchange for the quote currency. The spread is the difference between the ask price and the bid price.

There's a whole lot more to absorb if you're going to learn to trade Forex, but this should at least give you an idea of the basics. Once you have a firm foundation, building up a solid Forex account will be much easier.