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Forex Trading Basics For The Totally Clueless Beginners

The Foreign Exchange Market is referred to as Forex.

The stock market in the United States is divided into various branches, each with its own name. Some equities, for example, are traded on the Dow Jones, while others are traded on the Nasdaq.

Of course, all stock market transactions in the United States take place on the New York Stock Exchange (NYSE).

You may also learn the basics of stock trading to get a good grasp of how Forex works.

In other countries the same is true. One or more distinct markets may exist.

However, international trading takes place on the market designated the Foreign Exchange Market, or Forex.

Several countries from almost every time zone around the world participate in Forex trading, which uses multiple currencies and offers stocks and commodities from all participating countries.

Forex, unlike most domestic stock markets, does not operate on a "business day" basis due to a large number of countries and time zones involved. It's open for business 24 hours a day, five days a week.

Of course, for those of us who are human and cannot watch our investments 24 hours a day, these additional hours significantly raise the risk factor.

Because other countries are still trading when you are in a dream world, the value of your stocks could theoretically drop overnight, while you sleep.

It's the same with cars. There are a lot of moving parts beneath the hood, and just because you can't see them doesn't mean they're not working.

This is one of the reasons for a variety of safety measures, such as limit orders, which we'll discuss later.

This is also why it is strongly advised that your first attempts in making money on the stock market take place on a conventional nine-to-five domestic trading market rather than the Foreign Exchange Market.

In our automobile analogy, this is akin to asking someone who has never driven a car or even changed the oil to rebuild the engine.

How Forex Works: Looking At Its Functionalities

While Forex operates similarly to a domestic stock exchange, the commodities and prices are more volatile, and there are extra aspects to consider in addition to the usual dangers involved with a domestic market.

You'll have to deal not just with the value of your stocks and currency, but also with the foreign currencies involved in any Forex deals or exchanges, as well as the variations in the values of certain items and services across international borders.

It's the equivalent of driving a car with a manual rather than an automated transmission.

Domestically, the majority of the work is done for you, and all you have to do is navigate, similar to an automatic gearbox.

Shifting gears, on the other hand, is a lot like needing to convert money all the time. It can be distracting, and it certainly makes driving more difficult.

Because many countries' financial situations are not as stable as the United States, knowing where to put your money and what to expect next in the worldwide market can be difficult.

Knowing what areas and currencies are active in Forex will help you track the financial situation in the countries with whom you will be engaging more closely.

The Origins Of Forex

It was not an international trading market when foreign trade began.

It arose from the 1944 Bretton Woods agreement, which stated that other currencies would be pegged to the dollar, which was valued at $35 per ounce of gold at the time.

When a bank in Chicago refused to support a loan to a professor in the sterling pound in 1967, this precedent was established.

Of course, his plan was to sell the currency, which he believed was overvalued versus the dollar, and then buy it again after the value had fallen, making a rapid profit.

The Bretton Woods agreement was abandoned in 1971 when the dollar was no longer convertible to gold and the domestic market was stronger, and the currency conversion process became more flexible.

This gave the US a firmer foothold in international markets, and the US and Europe developed a strong commercial relationship.

Through the advent of computers and technology in the 1980s, market hours and usage were extended to cover Asian time zones as well.

Foreign exchange was valued at almost $70 billion per day at the time.

Today, over two decades later, trade has surged, with daily transactions totaling close to $1.5 trillion.

Trading over international lines used to be more complicated due to the multiple currencies involved across Europe.

Even while the leading participants in the European market were well-versed in international commerce by the time other markets joined in, there were far more currencies to keep track of — the franc, the pound, the lira, and a slew of others – than was practical.

With the establishment of the European Union in 1992, the wheels were set in motion to develop a common currency for most of Europe, and the Euro was finally established and put into circulation in 1999.

Today's Forex

While some nations have yet to embrace the currency as their own (such as the United Kingdom, which continues to use the sterling pound), the procedure of currency exchange has been simplified because there are no longer as many different currencies to deal with.

Instead of hundreds of currencies, the major economies trade in just five: the US dollar, Australian dollar, British pound sterling, Euro, and Japanese yen.

The Foreign Exchange Market is becoming global and multinational.

To suit all of the key players' time zones, the market is open 24 hours a day, 5 days a week.

Most of Europe, the United States, and Asian markets, particularly Japan, are now included.

Even Australia has entered the international trading markets, and because such countries are half a world apart from some of the other major players, time zones must obviously be considered.

Knowing how trade works in numerous currencies is a completely unrelated but probably more significant topic with Forex trading.

When the value of a stock is expressed in two different, non-equivalent currencies, how can you compare its worth across international lines?

And how do you calculate gains and losses when the conversion rate fluctuates?

Currency Conversion Explained

When you first start trading Forex, you'll need to learn how to convert currencies and observe the differences in values, as well as how to swap currencies between international lines.

This entails not only researching domestic market movements and currency values, but also international markets.

Managing Multiple Currencies

Since Forex is the Foreign Exchange Market, you can't expect everyone in the market to deal in US dollars.

And why shouldn't they? – but keep in mind that not all covet the US dollar.

With so many variables and volatile currencies being traded, how can you tell when a good purchase or sell is when you don't have a thorough understanding of the foreign currency value?

The first step is to locate a source that can provide you with a rough estimate of the current exchange rate between your home currency and the foreign currency in the issue.

This should serve as a starting point for any currency with which you may become interested.

Of course, this will not be constant down to the cent or fraction of a currency over the course of a working day, but at the very least, you'll know where to start, almost like North on a compass.

Such resources can be obtained all over the Internet, as well as through a variety of online and in-person brokers.

Currency Exchange Rates

It's also important to comprehend how the currency exchange is expressed.

The comparison is commonly expressed as a cross-rate ratio.

The two currencies are stated in a XXX/YYYY ratio in this configuration, with the XXX slot referred to as the base currency.

The base currency is normally expressed as a whole number, whereas the YYYY position is expressed as the decimal that matches the base currency rate the best.

It's similar to comparing miles per gallon or rotations per minute on an automobile – a straight comparison of one to the other expressed as a ratio.

A pip is the smallest fraction, or decimal, in which a currency can be traded, and it is commonly used to describe the degree to which a cross-rate is expressed.

The British pound sterling, for example, will be stated to the third decimal place if it may be transacted in thousandths.

The United States dollar is frequently expressed in hundredths of a penny (the fourth decimal place).

One US dollar may be comparable to 117.456 Japanese yen in one cross-rate expression.

This ratio is calculated as 1.000/117.456. The base currency is generally always expressed as a single unit (as opposed to ten dollars), and the US dollar is frequently used as that unit of measurement.

Because the entire numerical value (or big figure) of the secondary currency, or the currency in the YYYY position in terms of conversion, changes so infrequently, the Foreign Exchange Market typically just mentions the decimal portion of the number.

As a result, you might hear in the ratio above that the yen is trading at .456, with no reference to the 117 full yen shown in the ratio.

This is due to the fact that the exchange rate may fluctuate between 117.456 and 117.423, but not between 119.024.

Experiencing a change in the big figure – the whole number ahead of the decimal – would represent far too large a shift in value for a single trading period, unless the number was already within a few thousandths, and would be a rare event that could cause the entire market to swing dramatically in one direction or the other.

The US dollar, the British pound sterling, the Euro, the Japanese yen, and the Australian dollar are the most commonly traded currencies in Forex.

There would have been many more currencies to keep track of in the past (such as the franc, the lira, or the Deutschmark).

Many currencies have been abolished as a result of the concentration of much of the European market trading on Forex to the Euro, making a trade on Forex for other countries less complicated.

If you buy a commodity in one currency and the value of that currency declines against the US dollar, you can really profit by selling that commodity in dollars.

If the value of a foreign currency rises against the US dollar, the same is true in reverse. Of course, you can only profit from such a circumstance if the commodity in issue is traded in both currencies and marketplaces.

In later chapters, we'll go over this procedure in greater detail, as well as additional ways to profit from the Foreign Exchange Market (such as arbitrage).

You'll be able to more closely observe the change in currency conversion, including its irregularity and volatility, once you've established a base value for each currency and its conversion rate against other currencies traded on Forex.

Such concepts will no longer appear "foreign," and you will be as informed as to the professionals. Following that, you'll need to discover how to read, comprehend, and finally analyze further market patterns.

Trends in the Forex Market

You can keep track of numerous marketing trends by following charts, listening to market analysts and chartists, and learning to make intelligent predictions yourself.

The following chapter will go through how to use publicly available statistics to predict the next stock market move.

Is there a storm developing with winds of change and uncertainty, or will it be a clear, tranquil day with minimal activity?

How can you predict what will happen to your investments the next day, or even in the future?

For new traders, simply learning to read market trends can alleviate a lot of their natural nervousness and confusion.

In fact, watching shows about the market or reading the financial sections of the newspaper that detail the trends and projected outcomes can be a good way to get started.


Like any other investment, it is important to understand how it works together with the basic things you need to know.

Understanding the basics of Forex will help you propel further the world of investments and trading.

It would be more beneficial if you learn how to interpret statistics and basic trends.

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