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A Beginner’s Guide to the Forex Market

Generally, in order to purchase goods or services from another nation, an individual, business or government must use the currency of said nation. To facilitate this international trade, foreign exchange (Forex) currency is bought and sold around the world.

What is Forex?

ForexForex is the exchange of national currencies to facilitate international trade. For example, if Americans want to buy Sony televisions from Japan, they will need Japanese Yen. In this transaction, Americans would sell United States Dollars (USD) and buy Japanese Yen (JPY).

Typically for a normal purchase using a credit card the bank would handle the currency conversion for you. Or if you were actually traveling to Japan you might go to your bank and buy some Yen for your trip. A more expensive route would be to go to a currency exchange booth at the airport and buy your Yen there. But doing that requires that you pay a high transaction fee.

If however you thought the Yen would appreciate against the Dollar and therefore wanted to invest in Yen you would use a FOREX broker. Companies that trade internationally do this all the time in order to limit their currency risk. For instance, suppose an American company wanted to buy thousands of Sony TVs six months from now. If the Yen appreciated against the Dollar in the mean time it would end up costing them significantly more to buy the TVs than they had anticipated. So they might hedge their costs by buying Yen now on the Forex market.

Forex traders will bet on the price movement of these currencies. In this case another trader might want to hedge his costs against an appreciation in the Dollar so he is willing to sell the Yen now. An active Forex market also has other participants who are simply speculating on currency movements hoping to make a profit but in so doing they help to keep the market liquid.

Getting Started

Most Forex broker websites will offer a free demo account. You can read their glossary of terms to understand the basics. There are also plenty of great video tutorials to walk you through a typical trade. Social Trading allows you to watch the experts and mimic their successful trades. You can use a Forex trend indicator like Winner’s Edge Trading to give you an idea about what trends are happening now.
You can also hire a trading coach or concierge (an option on the higher level accounts), the most advanced Forex trading software will provide real-time charts and send you signals when your present parameters are reached. You can also download apps to turn your smart phone into a mini mobile trading machine.

Start Slow

Although the opening deposit can be quite low for many of these Forex brokers because they want you to try their systems out, you should be very cautious. Most new traders end up losing their entire account so it is essential to limit your risk by using “play money” in the demo account until you are sure you have a working system. Successful Forex traders are professionals and they use sophisticated systems to decide on their trades so you will be competing against the big boys.

 

Image courtesy of  sheelamohan and freedigitalphotos.net

About Tim McMahon

Work by editor and author, Tim McMahon, has been featured in Bloomberg, CBS News, Wall Street Journal, Christian Science Monitor, Forbes, Washington Post, Drudge Report, The Atlantic, Business Insider, American Thinker, Lew Rockwell, Huffington Post, Rolling Stone, Oakland Press, Free Republic, Education World, Realty Trac, Reason, Coin News, and Council for Economic Education. Connect with Tim on Google+

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