Forex Tutorials Part 1 - Forex Market

This is the first of many tutorials to come. I am a key believer in the power of active learning. So I will be jotting down what I will be learning here, and you can learn from me the same time I learn from other sources. One good thing about my learning is I am going to start from the basics, and I will be condensing information so that you, my reader can learn at a much faster rate without all the advertising fluff and whats not. I have flushed out lots of unimportant materials that are not key to understanding Forex and will only add them in later like trading times etc.

With that said, the first tutorial of this site will be on the Forex market.

In short, Forex market is the the foreign exchange market. Over the world, over $3 to $5 trillion is traded everyday, making Forex one of the most exciting, profitable and risky business. For additional information, more than 95% of Forex retail traders blow their account in the first 6 months. This means that out of 100 people, only 5 will still have money (profit-making is another issue) in their acocunts after 6 months.

You are effectively betting on how well a country's economy is going to be doing in the Forex market. If you buy USD against JPY for example, you are betting that US is going to be doing better than Japan.

Major Currencies

The table listed below comprises of various currencies being traded most frequently:

Currencies are traded in pairs, and when you buy one currency against another, you are effectively selling the other currency. The exchange rate will fluctuate based one which country is faring better based on investors' speculation.

There are a couple of major currency pairs and they usually have a lower spread (the price you pay when you buy or sell currency).

Major currency pairs include:

• EUR/USD
• USD/JPY
• GPB/USD
• USD/CHF
• USD/CAD

Its not necessary to really trade these pairs in order to be profitable. In fact, I have read about traders who trade and generate consistent profits by trading less well known currency pairs. One key concept you have to remember is when you buy one currency against another, you are expecting the base currency to increase in value relative to the quote currency.

Here is how you read the quote for currency pairs:

 

The base currency is the basis for buying or selling. In short, when you buy this currency, you are expecting the USD to appreciate against the JPY and when you sell this currency pair, you are expecting the USD to depreicate agaisnt the JPY. That is also why you do not need currency pairs like JPY/USD.

 

One thing you also need to know is PIPS. Basically, the more pips one has, the more profits he is making. With the exception of the USD/JPY pair, most currency pairs count 1 pip to the fourth decimal place. This means that if a quoted currency pair increase by 0.0001, we say that the currency pair has gained 1 pip.

 

Listed below is a sample for buying USD/JPY currency pair. As you can see, there is a discrepancy

 

between the buy and sell price. This is known as the SPREAD. The spread is your payment for a broker's service in buying or selling the currency pair for you. This is also the reason why there is no commission fees involved for buying or selling forex. If you sell the currency pair, you are selling USD at 98.644, and to profit from this trade, you have to buy back at at a price lower than 98.644. Forex traders need to overcome the spread in order to be consistently profitable.

 

With that, I will end the first lesson. This is considered the basics for the Forex market and understanding this basic concept is key to being a Forex millionaire in the future next time.