The Foreign Exchange Market and Your Forex Basics Explained by John Eather

The foreign exchange market being the world's largest trading platform, is up and running around the clock from Sydney to New York at least 5 days a week.

At any given time people are trading forex somewhere in the world with the forex market's liquidity being an important driving force of it's unparalleled popularity. Currencies are traded in pairs with the buying of one corresponding to the selling of the other. Sounds simple, right? Well, yes and no. The general theory may be simple but to actually trade forex for consistent and worthy profits is much easier said than done.

The US dollar is by far one of the most popular halves of currency pairs traded (eg. USD/JPY, EUR/USD, USD/AUD, etc.) When placing a position you will always be presented with a "buy" and "sell" price of the 1st currency in the pair. Essentially, if you buy say, 100 USD at 90 JPY and sell at 100 JPY, you'll pocket a tidy little profit of US$10. If you were to sell the USD at 110 JPY and buy at 100 JPY, then you would yet again profit another ten bucks. This is the easy part of trading on the foreign exchange market. The difficult part is knowing how to buy and sell the right currency pair at the right time.

When you are using a forex broker you are more than likely paying their renumeration via the spread of the trade. The spread is the difference between the Bid and Ask price when placing your trade. So if the Bid price is 87 JPY and the Ask price 90 JPY, then the spread of the trade is 3 JPY. You will need the market to move more than 3 JPY in your favour in order to make any profit from the trade.

Another very attractive and alluring trap of the foreign exchange market is the leverage offered to forex traders by many brokers known as a margin. This leverage ranges from 100 to 400 times your capital and is a double-edged sword. It can make you an obscene amount of money very fast or it can send you past "Go" without collecting $200 if you mess up.

This leads back to the old adage that you should never risk money that you can't afford to lose. Remember and abide by this rule and you'll be fine no matter what the outcome in the foreign exchange market.