Learn To Trade Forex – The Basics

I decided to learn to trade forex  about six months ago. Like most, I began my search on Google. I keyed in terms like “learn to trade forex” or how to trade currency, foreign exchange and foreign exchange rates.

I was hoping to find some free resources that would help me to understand exactly what Forex was all about. Here’s a quick synopsis: Forex or Foreign Currency Exchange is the process of buying and selling foreign currencies for the purpose of making money. The interesting thing about Forex is that, unlike the stock market, Forex is bought and sold 24 hour a day, seven days a week. In the Forex world, investors pay attention to any factor that may effect currency. For example: How will a Hurricane in Florida effect the US Dollar against the Japanese Yen. Forex traders study past history or “Forex Charts” to determine what kind of impact similar real-world events have had in the past.

Here are some definitions:

• Currency Pairs – Forex is bought and sold in units of 2 currencies. For example, selling U.S. dollars to buy Euros, you would be the EUR/USD currency pair.
• Forex calculator – This is simply program (typically online) that will convert amounts between currencies. For example, you may enter: 10 US Dollars and have the calculator return the total number of British Pounds that the amount equates to using the current exchange rate.
• Forex charts – These charts offer various views of the currency markets. Typically they are online and help you identify trends.
• Forex converter – These are once again, calculators that allow you to convert between different currency types. – See Forex Calculator
• Forex enterprise – This is a “Money makeing ebook”, it actually has very little to do with the Forex market. I don’t recommend it.
• Forex forum – This term refers to a wide array of Foreign Currency related websites that allow member to post questions and comments.
• Forex quotes – (Real Time Forex Quotes) Sites that provide current foreign exchange rates.

More In Depth…

The process of trading currencies may seem pretty simple, but as with most things, the devil is in the details. Here’s a basic primer for what you’ll need to know if you want to learn to trade forex…

I’ll try to give you a basic idea of how things works. However, always remember that I can only scratch the surface here. The Forex market is complex, fast-paced and requires a lot of study to trade for a profit.

What are currency pairs?

Above we defined Currency pairs as units of 2 currencies involved in a foreign exchange trade. As an example we used, the EUR/USD currency pair. However, if you wanted to sell Euros to buy U.S. dollars, you would look at the exchange rate quoted for the USD/EUR currency pair.

You might think they’re the same, well, they “almost” are, but you must look at the correct pair, in the correct order, based on the currency being purchased.

First, it is easier to calculate the results of your exchange in terms of how much of the base currency you can purchase with your ‘quote’ currency. Your base currency is the currency you intend to buy, and the quote currency is the currency you intend to sell in exchange for the base.

When quoting an exchange rate, your broker will list the base currency first in the pair, and the quote currency second.

This means that when you see a pair like EUR/USD, you are seeing the cost of 1 Euro in U.S. Dollars. An exchange rate quote of EUR/USD = 1.4436 means that 1 Euro costs $1.4436 in U.S. Dollars.

Likewise, the USD/EUR pair indicates the cost of 1 U.S. Dollar in terms of Euros. An exchange rate of USD/EUR = 0.5972 would mean that 1 U.S Dollar costs 0.5972 Euro.

The other reason is that you’ll want to know the difference between the ‘bid price’ (exchange rate) and the ‘ask price’ (what the market makers want for the currency).

The difference between bid price and ask price make up what is known as ‘the spread’. Forex traders are subject to spreads when opening or closing trades in the buying position. In other words, you are always subject to a spread when you buy, regardless of whether you are opening or closing the trade.

Open buy -> spread

Close sell -> no spread

Open sell -> no spread

Close buy -> spread

Let’s say that you want to buy the EUR/USD pair. The bid price is 1.4361. The ask price may be something like 1.4370. You must pay the spread of 0.0009 in order to do the trade.

Those are the basics of a currency trade, but there are other factors to take into consideration. In order to make a profit on currency exchanges, you must also know how to calculate the cash value of exchange rate fluctuations in terms of ‘basis points’ – or, in Forex jargon – ‘pips value’. These concepts go beyond the scope of this primer…

Lastly, to I would recommend you open some “Play money” accounts at the various forex brokers and learn as much as you can, before you start risking real money. There is a lot to learn and you’ll want to fully understand not only the forex market, but also the software you’ll be using when the time comes.

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Tagged with: currency trading • forex • learn to trade forex • what is forex

Filed under: Forex Basics

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