What is Forex?

[scorpion]

The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion -- 30 times larger than the combined volume of all U.S. equity markets.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

The FX market is considered an Over The Counter (OTC) or 'interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.


Understanding Forex Quotes

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).


Pros and Cons of Forex

Here's a really nice file on pros and cons: http://www.forex.com/pdf/pro2.pdf


Where to begin?

First off, download yourself a free copy of MetaTrader 4 Client Terminal from http://www.interbankfx.com/aboutdemo.htm. Yes it's totally free, unlike most stocks software. With MetaTrader 4 (or simply MT4), you will be able to open free demo accounts, learn to analyse charts, setup automated trading, and many more! Open up User Guide from Help menu if you need basic help on MT4. After download, I'd suggest you open it up and play with charts, indicators and drawings. Feel free to execute a few orders, sell EURUSD and close the order, etc.

You now have software to practice. Next step is to make money right away? I wouldn't suggest that for novices, because you'll need to read some books and then practice what you've learnt with MT4. It's worth it to spend a few bucks on some bestsellers by Alexander Elder to get started, to get a concrete base for the upcoming. Thru books, you will learn to setup charts, read indicators, control your emotion, trade with systems, and master many other vital skills.

You got the lessons, you should practice it for some time first. And, practice it in demo account, as you can blow as many as a million accounts without losing a real buck. Get that free advantage of forex you cannot get from Stocks trading--you don't need that real 50k to play first. But, anyway, do treat the money in demo account like your real money. Feel the pain when you lose and freak out when you gain some pips.

As you progress, I'd suggest you check out some online communities (fxfisherman, strategybuilderfx, and forex-tsd). What you will get are amazing custom indicators, profitable systems, groundbreaking ideas, tools, and so on. You'll learn from gurus, winners, and even losers.