Currency Trading Basics

Before you begin your serious study of forex trading, you need to know currency trading basics, what the process is all about and in broad terms how it works. That's what this article is about.

The whole forex market concept is based on the buying and selling prices of pairs of currencies. For example, how many U.S. Dollars would it cost to buy 1 Pound Sterling? How many Mexican Pesos for a U.S. Dollar? These relationships change and fluctuate all the time, so there needs to be agreement on the rates. For this purpose, the London market price is the generally accepted rate, although New York, Hong Kong and Singapore are also considered important forex trading centers.

The relationship and value of world currencies is not static. It fluctuates from day to day, and often many times within a day, based on several factors. These could include changes in gross domestic product of one or both of the countries whose currencies are being quoted, inflation rates, interest rates in one or both countries or even in other countries around the world, trade deficits or surpluses, and other more general economic conditions worldwide. When you learn to trade forex, you'll read the business press in a whole new way!

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The relationships of currency prices is expressed in a very specific way. Here's a brief explanation of currency trading basics.

Currencies are traded one against the other, and each pair represents an individual product. Each currency has a designated international currency code expressed in a three-letter grouping. For example, the United States Dollar is USD, the Japanese Yen is JPY and the Pound Sterling is GBP.

When you see a price expressed as USD/JPY, for example, that means the price of 1 U.S. dollar expressed in Japanese Yen. The first currency, known as the base currency, is the stronger of the two.

You trade based on how you think the relationship between two currencies will go, which you decide on the basis of your research and on recent market conditions. so if you think, for example, that the U.S. dollar is going to go up in value in relation to the Euro, you would buy U.S. Dollars and pay for them with Euros. If your prediction is right and the Dollar goes up, you sell the Dollars back on the forex and the difference is your profit.

That's a simplified summary of currency trading basics, but any advisor who knows anything about forex will emphasize that forex trading can make or lose you huge amounts of money. You can win big, but you can also go broke quickly if you don't know what you are doing or if you jump into the deep end too quickly. So ongoing forex education is vital.

Here's a currency trading guide I strongly recommend for its detailed explanation of how forex works and what to watch out for as you begin your forex trading career.