Forex Trading for Newbies

The foreign exchange market has evolved to allow currencies from all over the world to be traded efficiently

The trading platform allows the opportunity for individuals to speculate on the changes in value of currencies relative to each other.

The word 'speculate' is used because there is no certainty as to which way a currency's value will move, although with detailed trend analysis and the application of economic analysis (known as fundamental analysis), the probability of the movement direction can be predicted with a certain degree of accuracy.

You will make a lot of money trading currencies if you can consistently predict with accuracy the movement of currencies relative to others.

So in simple terms you need to be able to spot trends in the movements of currency, and make a profit from that trend before it changes! Trends move up and down, and are classified in three ways: long term, short term or intermediate. You will need to understand the differences in these classifications before you start trading.

Another basic term in forex trading is a currency pair. A currency pair indicates the price of one currency versus another (the exchange rate between the two currencies). Examples of commonly traded currency pairs would be:

EUR/USD: Euro GBP/USD: Pound USD/JPY: Yen

Because the whole forex trading market is based on the exchange of pairs of currencies, there cannot be a bear market. This is the case, because when one currency rises relative to another, the other has to have fallen. All currencies cannot therefore fall at once as with the stock market.

Taking the EUR/USD pair as an example, the EURO would be referred to as the base currency in the transaction and the Dollar would be referred to as the counter or quote currency.

Each currency pair are quoted in terms of units of counter currency required to buy one unit of the base currency. So for example, if the quote for EUR/USD is 1.3575, you would need to spend 1.3575 dollars to purchase one Euro.

Currrency pairs, similar to stocks, are quoted with a bid and ask price. The bid is always the lower price, and is the price the broker is willing to buy at (the price you will receive if you sell), and the ask price is the price your broker will sell at (the price you have to pay to buy the currency).

You will also come across a term known as the 'pip'. A pip is the minimal incremental change in value a currency pair can make. Typically, the quote for a pair is stated to four decimal places. From the example above, if the EUR/USD moved from 1.3575 to 1.3580, it would have moved by 5 pips. When looking to open a trading account, you also need to understand the term 'leverage'.

Leverage is one of the big advantages that forex trading has over trading in stocks. Leverage basically means you can trade as though you have a lot more in your account than you actually have. For example, some brokers offer leverage of up to 400-1, which means if you place up to $1,000 in your trading account, your broker will allow you to trade as though you really have $400.000! Yet in reality the maximum you can lose is your $1,000 investment that's actually in your account.

In simple terms, you are only required to deposit a small percentage of your actual trade. So the higher the leverage, the less actual deposit you have to invest to make a trade. Currency trading takes place online 24 hours a day, 7 days a week. When you look for a broker, look for brokers who offer commission free trading, high leverage and instant execution of your market orders.

Another good feature to look for is a free demo account, where you can simulate real life trades without risking your own cash, until you become knowledgeable enough to trade for real.