So you have decided to learn how to trade Forex? Or maybe you are just curious about how you can make money from trading Forex? Let me just say: Good for you and welcome to the exiting world of fx trading where millions are made and lost every minute. The only financial market where the ‘little man’ has a chance to play ball with the big players. Why is this? First of all, the forex market is by far the largest financial market in the world. It’s actually bigger than all other markets combined. Take the stock market and the bonds market and pool them together and you are still far from reaching the daily numbers that you get on the forex market.
So what exactly is traded on the forex market and how is it possible to make many there? Forex is an abbreviation of Forex Exchange, basically it means foreign currencies. Foreign currency is so important because it is used on an everyday basis by people in all situations. Just like when we go for a vacation and change money into the local currency, corporations must also do so when they buy and sell abroad. Add to that, that there are many players in the game only to speculate and you have a market that is very big and very volatile.
There is no centralized market for forex such as a stock exchange or commodities exchange and there are no fixed prices. Forex is traded on the interbank market that only banks and brokers have access too. That means there can be significant differences in prices of currency from region to region and time to time as the market adjusts. This process of earning on price difference is called arbitrage but is usually not an option for the smaller investor.
Forex is traded in currency pairs, these are denoted by the abbreviated base currency first and then the secondary currency last. An example is USD/EUR.
You make money by either selling or buying a currency with a different currency. Lets say you buy Euro with your USD. Now if the relative price of the Euro goes up then you have made money as you can exchange those Euro’s into more USD than you originally paid for.
While the actual process of earning from Forex is easy, it is far more difficult to actually predict movements of currencies because there is so many factors influencing the price. You have economic, financial and political factors to take into account as well as the psychology of the market.
This is why traders develop forex trading systems. These can be based on either technical or fundamental analysis.
Technical analysis aims to predict the future movement of a forex pair by analyzing the trend graph of a pair looking for patterns that are likely to repeat themselves.
Fundamental analysis aims to predict prices by taking into account the underlying economic, financial and political movements of a currencies base country.
Both require skill and dedication to master and both are very profitable methods of making money in the forex market.