Basic Concepts of Forex Trading

basic-fx-trading-conceptsEven if you have never traded on the forex, chances are that you have heard the term. Forex is a shortened form of the foreign exchange market, and those who deal in it are buying and selling different national currencies. The majority of forex trading is done out of simple necessity.

When travelling internationally, you must exchange your home currency for the currency used in your destination country. However, another subset of people uses the forex as a platform for earning profit.

What Is the Forex?

With more than $5 trillion traded on a daily basis, the is the largest investment market in the world, and it shares some characteristics with the stock market. The primary difference is that the forex is an over-the-counter interbank market, which means that there is no central headquarters or trading arena, such as the New York Stock Exchange (NYSE). Instead, trades are made during normal business hours in the local time zone.

If business hours have ended for the day in your local area, trades can still be made electronically by basing them in a region or country where transactions are still open. Because of this, it is possible to make trades at virtually any time of the day during the week and all but a few hours on the weekend. Another aspect of the forex that differentiates it from the stock market is that prices are based on market activity, but they are set by individual brokerage firms. This allows brokers to widen the spread between the bid price and the ask price in order for them to make money without charging commissions.

In addition, different rates may be charged depending on who is doing the trading. Bank-to-bank trades may have one rate, bank-to-broker trades another rate and broker-to-individual trades yet another.

How the Forex Works

Since you are essentially buying money with different money, transactions on the forex are made in currency pairs. Each currency is assigned a three-letter code, and they are paired together with the primary currency being listed first. For example, when you are buying euros with U.S. dollars, the currency pair would be USD/EUR. The name of the game in forex trading is the same as it is in the stock market: Buy low, and sell high.

However, many financial experts believe that the forex market provides a playing field that is more level than the stock market’s field because it is nearly impossible for anyone to have insider information.

You can get started in forex trading with very little training or experience because it is so easy to understand. You can run through self-taught courses that are available free online in only an hour or two, or you can enroll in a formal course that is held online, as a seminar or as a traditional class.

Online classes offer the most flexibility, and online forex trading is very efficient. Most online brokers also provide a suite of tools for analyzing currency pairs, history and world news that could affect currency values.

Learning about Forex Trading

When you are learning about forex trading, it is recommended that instruction and information is

provided on the following subjects:

1. Fundamental analysis

Fundamental analysis is the primary means people use in attempting to predict how the forex market will move, and it is identical to the strategy used by most financial forecasters and planners. In this strategy, you consider whether specific events will affect the market and by what degree. A few types of information that is often disseminated in fundamental analysis are as follows:

• Economic situations

• Industrial news

• Politics

• Weather

2. Technical analysis

Technical analysis is also a popular analytical strategy used by forex traders. This strategy is based on raw mathematics, statistics and numbers in general. All of the information that is used is sourced from the past history of the market. Following are some of the most popular types of information and tools for technical analysis:

• Trade quotes

• Currency movement

• Supply and demand by volume

• Simple and complex indicators

• Graphs and charts

3. Cash Management

Solid, reliable cash-management strategies are vital to the success of forex traders. The cash-management strategy you choose will define your trading style, a part of which is how much money you keep in the market at any given time. Profit can be made over the long-term or the short-term depending on your strategy and style.

4. Trading psychology

Several psychological issues exist in forex trading, and these issues can have an impact on your profit. When in the process of trading, it becomes easy to fall prey to your own emotions. You could be overtaken with greed, become addicted to trading or have a crisis of confidence, but all of these conditions can be overcome simply by recognizing and understanding them.

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