Forex Trading Basics - What you Need to Succeed!

By: Thomas Eliot

Success in FOREX trading is a matter of having the right knowledge and the right timing of the market. If you can combine these two elements, you have an opportunity to succeed in trading the FOReign EXchange (FX or FOREX) market.

Until very recently, the forex markets had been the trading grounds of the ultra rich and thus out of the reach of the average person. The trading units during that time were just too large for most ordinary investors to handle. Today, though, because there are foreign exchange brokers who have broken down the larger sized inter-bank trading units into smaller units, it allows more people to become involved in trading on the forex.

What follows are a few thoughts on the basics of trading in this specialized market. This section constitutes having the right knowledge element from the above forumla. As it continues, you will see where the right timing aspect comes into play.

Trading on the foreign exchange market involves the trading one currency for another. Each day, due to international trade and business elements or the political or current events in the various countries whose currencies are being watched, any given currency may fluctuate in price. A profit can be had in the FX by knowing when the currency of one country will fluctuate as against the currency of another country, and in which direction.

It is important to note that currencies are always traded and priced in pairs. When trading one foreign currency for another, usually the currency listed first is the stronger of the two. For example, GBP/USD indicates the relative dominance in strength of the British Pound in relation to the US Dollar. For instance, in today's trading the the value of one US dollar to the British pound is: 1 = 1.9534. In other words, one GBP is valued at $1.9534 dollars.

Depending upon which direction the two currencies are expected to go during the course of the day's trading, one could buy a contract on one or the other currency in order to initiate a trade. And then once that currency has made its move, sell that contract back in order to extract the profit from the trade. An open position on the forex is a trade in which a trader has bought or sold a particular currency pair without having made a corresponding trade to buy or sell back the equivalent amount to close the trade position.

Prices are quoted to the fourth decimal point in the forex market. For example, the GBP/USD might be bid at 1.9534 and offered at 1.9537. Profits are recorded in terms of pips or "percentage in point." A pip is the smallest price change in forex trading - for most pairs this is equal to .0001 or one one hundredth of one percent, or one basis point. In the above example, we can see that the spread is 3 pips wide.

The only exception to this method of computation is the Japanese Yen (JPY), which is quoted only to the second decimal point. For example, 117.89 in JPY to the US dollar equals one dollar being worth 117.89 yen.

Learning how to trade on the forex market requires a different trading mindset from the traditional mindset of trading on the stock market. In trading the forex, everyone has the same information available to determine the currency fluctuations. In addition, in order to be successful it is helpful to have or be following a system of trading which can help you to choose your trading positions. This can be a system which uses either a fundamental or a technical approach to trading.

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