There are a lot factors unique to the Forex market which make it a very exciting, fast-paced alternative to traditional investing:

• The market runs 24 hours a day from late Sunday to late Friday.



• The market is affected by world events and news more so than others



• There are no commissions to be paid out on your trades



• Extremely high-liquidity



• 100:1 Leverage (move $100,000 in currency using only $1,000 of your own money!)

These factors alone make Forex a fun and intellectually stimulating challenge. If you love to watch the news, keep up with politics and piece together all of the ways that the 'powers that be' influence the global economy, then you will really love the foreign exchange market.

In order to be a good trader, you must learn to see how events in one part of the world create ripples that affect the economies of nations all the way on the other side. It is truly a study in the interrelatedness of us all.

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Complete Newbies Guide to Forex Trading

The term 'Forex' is short-hand for 'foreign exchange.' The Forex Market = The Foreign Exchange Market.

What is being exchanged on this market is not stocks or bonds, but currencies (monies) from around the world.


In other words, the Forex market is the place where U.S. dollars, Euros, Yen and other major currencies are bought and sold. It represents the largest financial market in the world by volume.

The origins of the foreign exchange market date back to 1944, when The United Nations Monetary Fund convened in Bretton Woods, New Hampshire to devise a plan for stabilizing the world economy.

The British Pound had been, up until World War II, the monetary unit of choice when comparing the relative value of foreign currencies. However, Hitler's regime managed to devalue the Pound by way of a massive counterfeiting scheme. Something had to be done quickly in order to avert a worldwide economic depression.

Out of this meeting came the Bretton Woods Accord. This new policy implemented the Gold Standard, tying the value the U.S. Dollar to the price of one ounce of gold ($35.00 per ounce at the time). It was further agreed that the Dollar would replace the British Pound as the benchmark "currency of exchange".

All other currencies were aligned to the Dollar, and a 'fixed exchange rate" of +/- 1% was established.

In other words, a foreign currency could fluctuate a maximum of 1% higher or lower than the Dollar. Any fluctuations beyond this limit required that the 'offending' nation's central bank step in to correct the imbalance.

The Bretton Woods accord remained in effect until 1971, when it was determined that the U.S. dollar could no longer hold steady relative to gold. At this time, the 'fixed exchange rate' model was abandoned in favor of the 'floating exchange rate' we still use today.

Note: If any of these terms are unclear or confusing, don't worry. We'll look at them more closely when we get into the nuts and bolts of Forex.

The important thing to understand right now is that Forex trading among private investors is still relatively new. The market once operated almost exclusively between government (central) banks and commercial banks until advances in communication, such as the Internet and PC banking, allowed speculators easier access to the market.

The Forex Market today represents the largest and most 'liquid' of all markets in the world. The daily 'turnover' of trade volume, speaking in U.S. dollar terms, is on the order of trillions.

The major players involved in these trades are:

- Banks
- Governments
- Speculators
- Corporations
- Other, related financial markets and
institutions (e.g., brokers)

Now, one of the first things you must understand is that these institutions are NOT all on a level playing field with one another.

Unlike the stock markets, the Forex market is divided into restricted levels of access.

In other words, not all Forex traders have equal access to the same prices. The bid price and asking price (also known as the "spread") between currencies is in part determined by the size and volume of the trade.

The more money a trading entity can put on the line, the better the 'spread'.

As you might surmise, the central and world banking institutions (the 'inter-bank' market) are at the top of the tier. They are followed next by governments and large financial institutions or corporations.

The exchange rate can be defined as the the price of one currency in relation to another.

A fixed exchange rate, like the one established in 1944 by the Bretton Woods Accord, is an official rate set by monetary authorities (and sometimes governments).

Fixed rates are typically set to a pre-determined value (e.g., the price of an ounce of gold), and allowed only slight fluctuation.

A floating exchange rate is what is in effect on the foreign exchange market today. This type of rate is not set to any outside reference point.

Rather, the rate is determined by the market forces of supply and demand.

Although it is common to just exchange two currencies, the Dollar and the Euro, it is important to note that you must NOT view Forex trades as a simple one-to-one transaction.

Not if you want to make any real money, that is. Forex trading is not as easy as buying $10,000 worth of U.S. Dollars with $5, 000 worth of Euros after a market correction.

This doesn't mean you can't achieve these kinds gains, but you must understand that the majority of successful trades on the retail level involve a well-planned strategy based around buying and selling multiple currencies at a time - not just one or two.

When you buy stocks on the Stock Exchange, you have the option of buying the stock of a single company at a time, or multiple companies at a time. You may also choose to sell your stock back right away, or hold it for an indefinite period of time.

The value of stock from a company like Microsoft, for example, is determined largely by that company's performance (profits, meeting quarterly goals, etc), and not directly affected by the performance of other corporations.

The foreign exchange market works a little bit differently.

The value of any currency on Forex is determined in relation to the value of all other currencies. In other words, the value of 1 U.S. dollar changes based on whether you are comparing it to the Euro, the Australian dollar, the Japanese Yen and so on.


The buying and selling of any of these currencies is always done in what's known as currency pairs.

A currency pair consists of a base currency and a quote currency. The base currency is the currency you intended to purchase. The quote currency is the currency you intend to use to purchase the base currency.

Together, the pair shows you how much of the quote currency is needed to buy one 'unit' of the base currency.

To illustrate this, let's look at some exchange rates for December. 15th, 2007. We'll compare the U.S. Dollar against the Euro, Canadian Dollar and Japanese Yen:

1 EUR = 1.44245 USD /1 USD = 0.693265 EUR

1 CAD = 0.9830391 USD / 1 USD = 1.01720 CAD

1 JPY = 0.00882807 USD / 1 USD = 113.275 JPY

The pairs are as follows:

EUR/USD = 1.4 - selling Euros to buy Dollars
USD/EUR = 0.69 - selling Dollars to buy Euros

CAD/USD = 0.98 - selling Canada Dollars to buy U.S. Dollars
USD/CAD = 1.01 - selling U.S. Dollars to buy Canada Dollars

JPY/USD = 0.0088 - selling Yen to buy Dollars
USD/JPY = 113.27 - selling Dollars to buy Yen

Notice that the currency being sold is listed first. The EUR/USD pair tells you that for every Euro you sell, you are purchasing 1.4 U.S. Dollars. Likewise, the USD/EUR pair tells you that for every Dollar you sell, you are purchasing 0.69 Euro.

You are always buying and selling simultaneously when you trade currency on Forex.

Now, let's say that you wanted to turn a profit in U.S. Dollars by trading in these currencies?
In an ideal scenario, you would already be holding Euros in your online trading account, and you would have purchased these Euros on a day when the dollar was stronger.

For example, let's say you bought 1,000 Euro when the exchange rate was USD/EUR = 1.40.

This means that every $1 you spent purchased 1.4 Euros. In order to buy 1,000 Euros at that rate, you had to spend 1000 X 1.40 = $1,400 U.S. Dollars.

Make sense?

Now, let's say you held onto those Euros until the exchange rate went up to USD/EUR = 1.44. You wouldn't want to buy the EUR/USD pair (selling your Euros to buy Dollars) because you would lose money, right?

Instead, you look for something like the Japanese Yen, which is valued far below the Dollar, and then you think: "If the Euro is worth more than $1, then I can buy more Yen with Euros than I can with Dollars. Then, I can take advantage of the Dollar's strength against the Yen."

So, you buy the Yen with the Euro and then sell the Yen back to buy Dollars.

Let's do the math:

EUR/JPY = 163.3

1,000 EUR X 163.3 = 163,300 JPY

JPY/USD = .0088

163,300 JPY X .0088 = $1,437.04 USD

$1,437.45 - $1,400 = $37.45 Total Profit

I want you to be able to follow this, so let's recap what happened...

First, you traded the EUR/USD pair at a time when $1,400 U.S. Dollars could buy you 1,000 Euro. You held it and waited for both the Dollar and the Euro to rise against the Yen.

Then, you traded the EUR/JPY pair, effectively buying more Yen with Euros than you could with Dollars.

Finally, you traded the JPY/USD pair, and gained enough margin (via the purchasing power of the Euro) to gain a $37.45 increase on your original investment of $1,400 USD.

You effectively leveraged a series of currency pairs in order to profit. This is what I meant when I told you that Forex trading is never as simple as a one-to-one transaction!

There's one thing slightly off with the example I gave you above, though. You'll notice that I shortened the quotes by a few decimals places? I did so for the sake of making the math easier to follow.

However, when trading any currency pair, you must remain mindful of the full exchange rate, all the way down to the last decimal.

Remember when I said that most profits on Forex are made by trading on volume, and at very slim margins?

Even the slightest change in one of those numbers can have an impact.

What the heck is a 'pip'? A pip, in Forex terms, is defined as the smallest price change an exchange rate can make. Most of the currency pairs you trade will be quoted out to four decimal places, and a shift in any of those decimals reflects a shift in price.

A 'standard' pip is equivalent to 1 Basis Point or 1/100th of 1%.

Again, however, most currencies (with the exception of the Yen) are quoted to four places, which means that shifts can occur in the thousandth and ten-thousandths place.

Therefore, for most major currencies:

1 Basis Point = 1/10000th of 1% = 1 Pip