The Basics Of How The FOREX Market Works
At one time FOREX trading was only for international banks, bankers, the ultra rich and governments. In just the last decade or so, though, it has opened up to the average person. This means that this largest of all markets and possibly the greatest of opportunities is now open to you. With over $2 trillion being traded every day, and more people becoming involved, it is time for you to learn about this vast opportunity, and discover how you can profit, too.
Currency Values Fluctuate
Every economy fluctuates in relation to every other economy. This means that throughout any given day that the value of any nation's economy changes in relation to another. It is through this fluctuation that an enormous amount of money can be made - if you time it just right - and that is what the FOREX market is about.
The Goal - Pips
On the FOREX market boards, you will always see numbers that compare one currency with another. The US dollar is the base currency in most exchanges, and so it is listed first. An example of this might be in the formula for the dollar compared to the Japanese yen: USD/JPY 113.07. This means that at that moment, one dollar will buy 113.07 Japanese yen. Later on, when sold, the price of Japanese yen could be posted as USD/JPY 113.10. In this case, the pips earned would be the difference - 0.03.
When you consider that each pip is worth $1,000 and that each transaction is performed with $100,000, then this would represent a gain of $3,000. Most gains, however, are actually much smaller, usually not greater than 0.0003. Only the Japanese yen is shown to the hundredths place, while all other currencies are shown to the ten-thousandths place – 1.17508.
Indicators Show When
By learning what the various indicators are that reveal when a fluctuation is about to take place, you can know when to buy and sell a nation's currency, leading to a profit. The FOREX indicators lead to predictions in one of two ways. There is the fundamental method, which involves studying the financial and political news, and there is the technical method, which is watching the history of an economy and how it behaved in the past - the trends. This system relies on charts and believes all you need to know for FX wins - is in the charts.
Although most listings are based on the US dollar, there are some exceptions. This happens in those currencies that are stronger than the dollar, such as the euro, the English pound (also called sterling), and a few others. Many different currencies can be bought and sold at any time. It is not limited to transactions that involve the US dollar. 
Understanding Is Needed
It will take a little time to learn what you need to know in order to get started in FOREX. The more you know the safer your trading will be. It is not the same as the stock market and you need to learn and know how to interpret the indicators. Beyond these basics, however, it is always a good idea to read some books and materials from the experts on FOREX.
Each FOREX Web site offers software, charts, and other FX information. You will have to learn how to use the software and understand what each factor it reports means. Most Web sites will focus on either the fundamental method or the technical. So, after you understand the system, then you will need to select your own system, the Web site you want to use, and the software.
Forex Trading - Currency Trading vs Stock Investments
The title points up an important difference between forex and stock investing.
When buying stocks you're making an investment in a company. Buying shares is short for 'purchasing a share of ownership'. By contrast, no one is making an investment in Japan by buying yen. We leave aside politically motivated actions by large central governments. Currency is exchanged in order to facilitate the movement of goods and the payment of services between multiple countries, but that's a relatively small percentage of the total $2 trillion daily volume. The largest amount is simple speculation.
Well, perhaps not very simple. Trading euros against dollars against yen against pounds against... in a twenty-four hour market with a dozen time zones... it gets complicated.
Margin differences between the two markets are enormous. Most stock brokers will leverage (lend investors money) up to 2:1. In currency trading 100:1 is common. Since price movements occur twenty-four hours per day every day, margin calls can occur while the investor is sleeping. That makes for a bad awakening.
Trading cycles are generally much shorter. Stock investments are made, even by professionals, on timelines of months or years. Currency trades are often completed within a day or even minutes. Yes, that happens in the equities markets, too. But, it isn't the norm even though it's more common than ever.
All these differences suggest some lessons for the investor interested in forex trading.
Do your homework.
Be aware of factors affecting currency rates. That includes not only the standard domestic economic indicators, but trade imbalance figures, central bank policy changes and others.
Watch the market.
Small, rapid changes can force your position into an area that motivates your broker to execute a margin call. Be prepared to cover your position or liquidate at times favorable to you. Know the broker's margin call policy and practice. You'll be required to sign a margin agreement when opening an account. Read it first.
Practice.
When starting out, take advantage of the demos offered by most brokers. Execute paper trades - trades that don't execute on the real markets - using the real currency figures.
Get a feel for the amounts, the percentage changes and get used to converting currencies from one country to the next. You should be able to estimate without much thought how much 1,000 pounds is in dollars at the current exchange rate.
Opinions and size don't matter.
Unlike stock markets, the size and complexity of the forex markets makes it virtually impossible for any investor, no matter how large, to dominate the price. Program trading, fund trading and so on that can cause large movements in particular equities has a negligible effect on currency prices.
Similarly, analyst projections have much less influence in currency trading. Many will read eagerly some influential columnist's opinion of the future of IBM. Opinions of that kind are largely discounted in currency trading.
It's a different world out there.
There are around 4,500 stocks listed on the NYSE and 3,500 on NASDAQ. And many more on other exchanges. A few hundred are major players. By contrast, only a dozen currencies account for 99% of all trades. With four major markets trading twenty-four hours per day, the action is very concentrated.
No need to be intimidated though. Currency trading has moved in the last decade from the realm of the professional trading millions at a click to mini-accounts of $250.
So, go make some money.
