Introduction To Forex

Posted by Nick Niesen on October 29th, 2010

I'm sure you've already heard of Forex trading. it is one of the hottest topics around these days. But what exactly is it and how can the average Joe make money in Forex?

Forex, also called "FX", is short for foreign exchange. The foreign exchange doesn't get the big press like stocks, options, and commodities. But the foreign exchange is the biggest market in the world and it offers investors an incredible opportunity for profit.

When you trade on the foreign exchange, you don't trade in stocks or bonds, but in currency. Simply put, Forex trading is just the buying of one currency and the selling of another. As exchange rates go up and down, you either make or lose money.

With Forex, you're not investing in a single company or even a group of companies. You're investing in the economy of nation. You are betting that the overall economic health of one nation will improve in relation to that of a second nation.

For example, let's say you are analyzing the US Dollar and the Japanese Yen. Your research seems to indicate that the US dollar is undervalued and is due for a rise in price, and at the same time you expect the Japanese Yen to lose value. In this case you would execute a trade to buy US dollars and sell Japanese yen. If you are correct and the exchange rate rises, you make a profit!

So its a piece of cake, right? Well no, not really. Currency prices can be incredibly difficult to forecast because there are so many factors that can contribute to a change in exchange rates. And you must remember that in currency trading you always trade in pairs. You buy one currency and sell another. So you can't just look at one nation's economy; you must look at two.

Of course, you do not have to limit yourself to only one pair of currencies. There are dozens of different currencies to choose from. But if you are just starting out, I suggest sticking to the seven major currencies:

USD - US Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
CHF - Swiss Franc
AUD - Australian Dollar
CAD - Canadian Dollar

Most small investors concentrate their trading on just these seven currencies.