Foreign Exchange Basics

Trading the Foreign Exchange market can be a rather daunting task for the newbie. But by learning some of the basics, you can get up to speed quickly.

You will come across several different terms regarding the Forex market. Forex and FX are both short ways of saying 'foreign exchange'. Forex can also be called the currency market, the foreign currency market, and the currency trading market. They all refer to the market where the world currencies are traded.

The Forex market is not situated in one particular place. Practically every country is involved so most currencies can be traded. Because of this, the market runs 24 hours a day, five days a week. The week starts on Monday morning in Sydney, Australia (that is, 5 pm Sunday EST in the USA) and ends at 4 pm EST on Friday in New York. During that time it is always possible to trade currencies somewhere in the world.

The Forex market is a surprisingly recent phenomenon. Up until the 1970s, currencies had been stable relative to one another since the second World War. What was called the 'gold standard' gave every currency a value in relation to the US dollar. This system was introduced in order to maintain a stable world economy.

However, in the early 1970s, the USA abandoned the gold standard and the values of the different currencies began to change. Banks immediately began to exchange currencies for profit, buying low and selling high, instead of only making exchanges when they needed to transfer money from one country to another. In effect, each currency became a tradable commodity. This was the beginning of Forex trading.

The value of a currency is tied to the relative prosperity of it’s nation. If the country is doing well, so in turn will it’s currency and vice versa. The fluctuations on the market can be incredible as well as the transfer of wealth. The total value of transactions on the Forex market now averages almost $2 trillion dollars a day.

The market is still dominated by international and investment banks, major corporations and other large financial institutions. However, in recent years there has been a surge of individual investors trading through brokers. With improved software and easy to use trading platforms, just about anyone can set up an account and trade the Forex in minutes. Despite the popularity, however, individual investors make up only 2% of the total market.

The most common exchanges involve the US dollar against other currencies like the Euro, Pounds, Yen, and the Franc. But it is possible to trade any one currency against another. Many automated Forex robots focus on less popular currency pairs (ex. Pound/Euro).

The Forex market can seem daunting for the individual investor based on its size and scope. But in actuality it is much easier to trade than other markets. Some brokers will let you start with as little as $250. I highly recommend paper trading until you find a profitable strategy or an effective automated robot.