Forex Basics - Forex Overview and How To Trade Forex

Foreign Exchange or Forex is a trillion dollar business. It is possible for you to do very well. In fact you could do exceptionally well but this will only happen if you are serious about this and if you treat this like a business. Forex is not an opportunity for easy money nor is it a get rich quick scheme. If you are looking for a quick fix, you are wasting your time. If you are serious about making money (lots and lots of it), Welcome to my Hub.

Spot Market is a term that you will come across quite often. A Spot Market contains “Spot Prices” which are defined as the prices that the banks are dealing in the forex market at that time. I mean literally at that moment. For example you make your way to your local currency exchanger and you see that it costs x amount to buy American dollars. This is the “Spot Price”. If you look closely at the board you will notice that if you buy 100 American Dollars for x amount of British Pounds Sterling, if you sell the 100 American you will get y amount of British Pounds Sterling. Y is lower than X. This is the cushion that banks put in between buying and selling prices.

Mammoth Interbank and large volume trading takes place on the Spot Market at Spot Prices. Heavy trading in the Spot Market is the driving force behind the forex market because there are over 4500 world banks and massive financial institutions that are involved in daily financial transactions.

If you take a look at the graph, the forex market virtually dwarfs the US Stock market and the US Treasury bond market, which themselves are massive international markets. About 1.88 Trillion US Dollars are traded in the foreign exchange market daily.

Trading sessions (GMT)

Asia                 00.00 – 09.00
Europe            07.00 – 17.00
US                   13.00 – 22.00
*Saturday and Sunday will have very light trading.

I have included this section so that you can understand how the Forex market has evolved quite dramatically. The Foreign Exchange market used to be a playground for only the wealthy having a few million dollars riding on currencies. Advances in software, communication and most importantly leverage (I will come to that later) have made it possible for the user at home with a balance of 1000 dollars (recommended) or less to have vast sums of money riding on currencies.

In the early days, customers traded via banks with approved credit and no margins. To explain that further, say for example you took a million dollars and deposited it in a bank with the intention of dealing in the Foreign Exchange market. The bank then runs a credit check on you to check if you are actually good for any money. You had to then obtain the services of a dealer and negotiate dealing spreads over the phone. This period was like the gold rush for dealers as they could have you on one line as a buyer and have a seller on the other end. The dealer may negotiate with both parties and build up a considerable spread for himself to profit. This is also called On-Exchange Dealing.

Advances in computers, software and the Internet have lead to the rise of the retail trader, which is you and I, sitting at home using a software brokerage platform. These brokers are called Futures Commission Merchant or FCM’s and they are registered with the Commodity Futures Trading Commission who is the regulatory body. Dealing with brokerage platforms is called Off-Exchange Dealing.

Off-Exchange dealers are companies’ setup to facilitate the process of trading in the Foreign Exchange Market for retail traders. These dealers get various bank feeds and display collective feeds on their platform software to determine the Spot Price. Off-Exchange dealers are extremely attractive to retail traders because they offer a 100% Margin.

In the foreign exchange market you deal in pairs of currencies. Such as if you were dealing in EUR/USD, EUR (euro) is your base currency i.e. the currency that you own. USD (US dollars) is the cross currency i.e. the currency you measure your Euro up against. EUR/USD is an example of a currency cross. There are four major currency crosses.

EUR (euro) / USD (US Dollars)
GBP (British Pound) / USD (US Dollars)
USD (US Dollars) / JPY (Japanese Yen)
USD (US Dollars) / CHF (Swiss Franc)

Other Currency Crosses Worth Mentioning

USD (US Dollars) / CAD (Canadian Dollar)
AUD (Aussie Dollar) / USD (US Dollars)
NZD (New Zealand Dollar) / USD (US Dollars)
EUR (Euro) / JPY (Japanese Yen)
GBP (British Pound) / JPY (Japanese Yen)
CHF (Swiss Franc) / JPY (Japanese Yen)

The Japanese Yen is the second most traded currency in the world after the US Dollar.

I find this thought quite interesting and I had to include this for you to ponder about. Say you had a million dollars (USD). Lets say you had this in the bank. The problem is that even though this is a large sum of money, you are seriously prone to fluctuations in the USD. This may not be apparent at first but you will realise it when you travel abroad. For example during the recession, the USD was so weak against the Euro that a holiday in Europe cost an absolute fortune for tourists from The United States. If you keep a portfolio in USD only, you are a Consumer.

On the flipside of the coin, a Speculator makes decisions based on speculations and the understanding of the fundamentals and geo-politics of the markets. I will elaborate on this later but in a nutshell; a speculator will use technical analysis of charts to make decisions and profit from the Foreign Exchange Market.

I am assuming that you don’t have a million dollars but would like to start trading. The best option for you would be to open up an account with and Off-Exchange Brokerage Firm (explained above). You will have to agree to their brokerage agreement and their risk disclosure and please be prepared to give out some personal information as well.

You will then be given the option to deposit funds. My advice is to start with at least $1000. Once this is done you will be offered leverage to assist you in trading large sums of money.

In the Foreign Exchange Market, you trade what is known as lots and mini lots. 1 lot is equivalent to $100,000 and 1 Mini Lot is Equivalent to $10,000. In this case if you have deposited $1000 in a brokerage firm, you will be able to purchase a $100,000 Lot and have this sum of money working for you in the Forex Market.

Now that we have covered Lots and Mini Lots, PIP’s is another term that you will come across very often and is in fact your objective to win in the forex market. A PIP is one hundredth of a cent. A PIP move is when a currency moves 1/100 of a cent in value. The value of a PIP move in a lot ($100,000) is $10. This may not seem much at first but you will see as many as 200 PIP’s in one day, which could mean $2000.

The beauty of the Forex market is that you can make money buying a currency cheap and selling it when it goes high and then subsequently buying back the currency when it goes down again.

Are You Interested In Learning How To Trade In The Forex Market?

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If the answer is yes, Then please Follow me as I have a range of Hubs based on The Foreign Exchange Market that I will release. Stay Tuned...

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