Currency Trading Basics

FOREX trading means basically nothing other than direct access trading of different types of foreign currency. Foreign exchange trading was traditionally limited to institutional traders and large banks. Nowadays, it is open to many more people and small traders have flocked to take up the challenge. It is made easier by technological advances which have placed online trading platforms within reach of pretty much anyone.

World currencies are on a floating exchange rate, and are always traded in pairs. There are a few major currency pairs which constitute about 85 percent of all daily transactions. These are Eur/USD (Euro/US Dollar), USD/JPY (US Dollar/Japanese Yen), GBP/USD (Pound Sterling/US Dollar), USD/CHF (US Dollar/Swiss Franc) and EUR/CHF (Euro/Swiss Franc).

However, trading isn't restricted to these pairs. There is a healthy market in minor currency trading as well.

Each transaction in foreign currency trading is simultaneously a purchase and a sale. If you think one currency is going to appreciate against another, you buy the first currency with the second. Then, when the value of the second has fallen against the value of the first, you reverse the transaction and buy back the second currency by selling the first.

Say, for the sake of argument, one pound is currently worth one dollar.

If you think the pound is going to rise in value against the dollar, you might buy £10 for $10 (effectively, you are 'buying' pounds and 'selling' dollars in the one transaction).

Say your prediction was correct, and the pound doubles in value against the dollar, your £10 is now worth $20.

You then sell the £10 for $20 (you are effectively 'selling' pounds and 'buying' dollars in the same transaction) and you have doubled your dollar equity.

In FOREX terminology the two transactions are referred to as opening and closing a position.

In reality time frames are very short and the fluctuations in relative value are very small, but this serves to illustrate the basic principle.

These FOREX transactions are performed on your behalf by dealers at major banks or FOREX brokers. FOREX is actually a huge part of the world money market, and it is carried on around the clock around the globe 24/5 (there is little trading at the weekend.)