Forex traders can earn a ton of money from the comfort of their own home.  However it can also go the other way.  Although you hear stories of people making an average return of 2-3% per week or more, there are also people who are not experienced who lose much more.  Before trading, you must have a clear understanding of how the trillion dollar plus per day market functions.

Here are a list of the positive aspects of learning Foreign Exchange trading (from babypips.com)
-You are your own boss!
-You don’t need any customers!
-You don’t need employees!
-You can operate from home, work, vacation or anywhere else in the world as long as you have a high-speed Internet connection.
-You never have to worry about job security, harassment or any other employment-related anxiety.
-You never need to worry about employer payroll, strikes, theft, rent increases, health inspectors, lease problems, being sued, etc…
-You don’t need to do any cold calling.
-You decide which days you wish to work.
-You make the decision to take a vacation at a moment’s notice.
-You are your own boss!

What is Forex?

Forex stands for Foreign Exchange.  The market is in place so that currencies can be quickly and easily exchanged for one another in order to ease in transactions between countries who operate on varying currencies.  For instance if you were to Travel from The US to Europe you would need to exchange your US dollars to Euros.  How do you do this?  You enter the forex market and exchange your currency at the going rate.  Every Day over $2 trillion ($2,000,000,000,000) is exchanged in the market.  This is 3 times all the stocks and future contracts exchanged worldwide on a given day or 80 times the dollar volume of the Nasdaq.

What determines the Exchange Rates and how does it work?

In almost all cases, the exchange rate of a currency versus other currencies is a direct reflection of the condition of that country’s economy, compared to the other countries’ economies.  So if the US Economy just released data showing it has grown at a faster pace then predicted, then the USD (Us Dollar) will go up in relation to the other currecnies on the market.  Having said this, the underlying cause of a price change just like any other free opened market is supply and demand.  If supply of the USD is lower then it’s demand at the current price, then the USD will increase in value.  Unlike other large markets, for instance the NASDAQ, the forex market is opened 24/7 365 days out of the year, making it even more hectic to follow if you have an open position.

Forex Currency symbols:

Just like ticker symbols in the stock market, each currency in the Forex market has it’s own 3 letter symbol as well as a nickname.  Here is a list of the more frequently traded currencies:

Symbol, Currency, Nickname:
USD – US Dollar – Buck
EUR – Euro – Fiber
JPY – Yen – Yen
GBP – Pound – Cable
CHF – Franc – Swissy
CAD – Canadian Dollar – Loonie
AUD – Australian Dollar – Aussie
NZD – New Zealand Dollar – Kiwi

For a list of all the other Currency symbols as well as other Forex related symbols goto:  http://www.forextraderonline.com/symbolGuide.htm

Why Trade Forex Currencies:

#1 – No commissions
No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are paid for their services through something called the bid / ask spread.

#2 – No middlemen
Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.  This is unlike that of most stock exchanges, except for those brokers on the floor.

#3 – 24-hour market
There is no waiting for the opening bell  The Forex market never sleeps. This is awesome for those who want to trade on a part time basis, because you can choose when you want to trade, morning, noon or night.  Trade when you want how often you want.

#4 – Virtually Impossible to corner the Market
The Forex Market is so huge that not even the Central Bank could corner the market if they wanted to.

#5 – Leverage Available
Leverage will allow you to control a very large contract Value.  You can often trade on a 200:1 margin which means if you put $10,000 into a forex account, you can then purchase up to $2 million in currency contracts.  This allows the trader to earn larger returns on their money.  Be careful though because you can also lose a ton.

#6 – Extremely Liquid Market
Once again, the market is so large, and there are so many trades in a given day that it is always possible to quickly execute a trade within seconds.

What Does It Cost to Trade Forex?
An online currency trading (a “micro account”) may be opened for with a couple hundred bucks. Micro accounts and the mini account, are both great ways to get your feet wet without drowning. For a micro account, we’d recommend at least $1,000 to start. For a mini account, we’d recommend at least $10,000 to start.

How to Read an FX Quote

Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:

GBP/USD = 1.6500

The first listed currency to the left of the slash “/” is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.6500 U.S. dollar to buy 1 British pound.

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.6500 U.S. dollars when you sell 1 British pound.

The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.
You would buy the pair if you believe the base currency will appreciate (go up) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (go down) relative to the quote currency

Long Vs. Short Positions

-If you wish to buy a position, meaning you buy the base currency, and sell the quote currency, this would be considered going Long
-If you wish to sell a position, meaning you want the base currency to fall in relation to the quote currency so you can later buy it back, this would be considered going Short.
Bid/Ask Spread

All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.

The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price at which you (as the trader) will sell.

The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy.

The difference between the bid and the ask price is popularly known as the spread.

Let’s take a look at an example of a price quote taken from a trading platform:

On this GBP/USD quote, the bid price is 1.7445 and the ask price is 1.7449. Look at how this broker makes it so easy for you to trade away your money.

If you want to sell GBP, you click “Sell” and you will sell pounds at 1.7445. If you want to buy GBP, you click “Buy” and you will buy pounds at 1.7449.

In the following examples, we’re going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair. If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry!  We will cover fundamental analysis in a later lesson. For right now, try to pretend you know what’s going on…

EUR/USD
In this example Euro is the base currency and thus the “basis” for the buy/sell. (Examples taken from http://babypips.com)

If you believe that the US economy will continue to weaken, which is bad for the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will rise versus the US dollar.  If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will fall versus the US dollar.

USD/JPY
In this example the US dollar is the base currency and thus the “basis” for the buy/sell.

If you think that the Japanese government is going to weaken the Yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen.
If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to Yen, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

What is a PIP?

The most common increment of currencies is the Pip.  If the EUR/USD moves from 1.3450 to 1.3453, then you would say it increased by 3 Pips.   A Pip is simply the last decimal place of a quote.  One pip in the EUR/USD quote would be 0.0001, where as one pip in the USD/JPY quote would be 0.01 since a USD/JPY quote looks like this:  117.97, only goes to the 2nd decimal.

What is a Lot?

Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is only $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.  For instance if the EUR/USD goes up by 1 pip and you own (1) $100,000 lot, then you only really make $10.00. (.0001X100,000 = $10.00)  This is why leverage come in handy.

Order Types:

Market Order
A market order is an order to buy or sell at the current market price. For example, EUR/USD is currently trading at 1.2140. If you wanted to buy at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price. If you ever shop on Amazon.com, it’s (kinda) like using their 1-Click ordering. You like the current price, you click once and it’s yours! The only difference is you are buying or selling one currency against another currency instead of buying Britney Spears CDs.

Stop Loss Order
A stop-loss order is a limit order linked to an open trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won’t miss your basket weaving class.

Limit Order
A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. For example, EUR/USD is currently trading at 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a buy market order), or you can set a buy limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class). If the price goes up to 1.2070, your trading platform will automatically execute a buy order at that exact price. You specify the price at which you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active (GTC or GFD).

Forex Signals:
Using various technical studies, numerous types of signals can be derived from currency charts:

-The SMA (Simple Moving Average) shows traders buy signals when currency prices rise above the average line. Sell signals also occur when the price falls below the simple moving average line.

-MACD (Moving Average Convergence Divergence) studies have a signal line that is used to generate a buy signal (above the line) or a sell signal (below the line).

-Volume indicators are used to determine market interest. High volume (especially near the bottom of the market) can indicate the start of a new trend while low volume indicates investor uncertainty. For instance if a currency pair is trading rather low, and the volume suddenly picks up in a few upticks, then this could indicate a larger trend upward.

-Bollinger Bands indicate potential changes in the market for a currency. Sharp price changes usually occur when the bands tighten while prices that touch one band tend to go all the way to the other band. The tighter the bollinger bands the greater the chance of a price breakout either way.

The 2 Types of Market Analysis:

Fundamental Analysis:
Looking at the market, and analyzing it on the current economic, social and political forces.  An example of Fundamental analysis would be noticing that the United states economy is doing well, and then coming to the conclusion that the US dollar is also going to do well and gain strength.  If the Economy of the United states is performing well, then the Federal Reserve of the US will have to raise interest rates in order to alleviate inflation.  As interest rates rise the dollar becames more valuable to investors, since it earns more money for them now that rates have risen.

Technical Analysis:
If I need to sum up Technical Analysis with one word, that word would be “charts”.  By viewing various charts, one can notice trends which can often predict future price movements.  If the price breaks a certain point that had been acting as a ceiling, then it is likely that a positive breakout has occured.  Of course, you can’t always just rely on trends, and it is much more complicated than our example.

To become a successful trader, you must always incorporate both types of analysis.

List of Resources all Traders should have:

Information and News:
- http://www.forexnews.com – Everything you need to know about the current events in the Forex world
- http://www.dailyfx.com – Up to the minute forex breaking news
- http://www.forex-sam.com – Filled with tons of information graphs, charts and analysis
- http://www.finotec.com/en/Archive/today – Finotec Daily Forex News and Analysis
- http://www.forex.com – Up to date news as well as a free practice trading account
- http://www.forexblog.org – One of the top Forex trading blogs updated daily
- http://babypips.com – Free forex course for all levels of understanding
- http://www.investica.co.uk – Global currency market analysis, including daily strategic reports, weekly analysis, market commentary and hedging recommendations.
- http://www.fx-charts.com – Free forex trend signal charts for the 4 major currency pairs, updated on a 5min basis, free forex forum, trading tools for short term forex traders and trading learning centre.
- http://www.e-forex.ro – Free Trading signals
- http://www.forexmentor.com/blog – Peter Bains professional Forex blog
- http://forexadvice.eu – Packed with great Forex information and tips
- http://www.forex-daytrading-systems.com – Site dedicated to Forex trading systems

Forex Tools:
- http://www.babypips.com/tools/economic-calendar – The Forex calendar.
- http://www.oanda.com/products/fxmath – A bunch of Forex related calculators
- http://www.babypips.com/forexpedia/index.php/Main_Page – The Forexpedia.  Every term and word you ever need to know about Forex
- http://fxtrade.oanda.com/spreads/SpreadCostCalc.shtml – Spread/Cost Calculator

Forex Related Forums/Message Boards:
- http://www.forexfactory.com/forum.php – One of the busiest Forex related forums, with a lot of good systems
- http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi – Oanda’s forex discussion
- http://forums.babypips.com – Baby Pips Forum, Learn forex trading
- http://www.piptrader.com/forum/default.asp – PipTrader forum
- http://www.commoditytrader.net/forex_forum.htm – Commodity Trader forums
- http://www.daytradingthemarkets.com – Different type of forum about Forex.
- http://www.moneytec.com/forums – MoneyTec Forums.  Around since 1999

Brokers:
- http://www.apexforex.com – Commission free online Forex broker with free real-time charts, quotes and news and flexible contract sizes. Only 3 pip spreads and free 60 day real-time trading demo.
- http://www.brokers-search-engine.com – The largest online database of brokerage services.
- http://www.fxcm.com – One of the leaders in the industry
- http://www.fxsol.com – Forex Trading with FX Solutions offers online foreign exchange traders the advantage featuring low spreads, commission free 24/7 trading,

Other Resources:
- http://www.forex-bookstore.com – Forex Books you must read
- http://www.top100forexsites.com – List of the top forex related websites

About the Author:

Brian, the admin of talkgold HYIP investing forum. He is an Expert in Many areas such as HYIPs, Autosurfs, Domain marketing, GPT and so on.

For more info about Brian and his sites, just click here.

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