Forex Trading for Beginners Part 2

This is my second article about forex trading and in it I will explain more about this exciting arena of investing. As I mentioned in my first article forex trading is the largest form of investing in the world with over $4 trillion dollars worth of trades being executed every

day. Most of this volume is traded online and this is what has really facilitated the rise of forex trading. Because of the speed of the internet traders can execute trades much more quickly and can make many more trades than was ever possible before.


Let's start to learn a little more about forex trading and the basic knowledge that is required to start trading. First, let's look at some of the terminology that is used in forex trading. The basis for all trades is the fact that the prices of currency are always listed in pairs. For example, the British pound and the American dollar would be portrayed as GBP/USD - 1.7500. What this means is that to buy the base currency (in this case the British pound) you would need to pay $1.75 of

the quote currency (in this case the American dollar). The base currency is always listed first and the quote currency is listed second.


By far, the US dollar is the most traded currency since it is involved in 86% of trades followed by the euro at 37% and the Japanese yen at 16.5%. Forex symbols are always three characters where the first two letters identify the country and the third identifies the currency.


The basic premise behind a forex trade is the trader's expectation that one currency will weaken or strengthen in relation to another. In the above example we saw a ration of 1/1.7500 between the GBP and the USD. What a trader will do is either buy or sell GBPs or USDs based upon his expectation of what the currencies will do in the future. And remember, with the speed at which you can make trades and the ease with which you can do it, the word future can mean a lot of things from mere minutes to days or longer.


So, if the trader thinks that the American economy is weakening and therefore the USD will weaken against the GBP he would sell USDs and buy GBPs. If the USD does, in fact, weaken then he can sell his GBPs back into USDs for more than he paid for them and realize a profit.
Forex trading is really no more complicated than this. What can get complicated is the degree to which analysis by traders is done to try to determine which way the currencies will go. This is where things get really interesting and this is something I'll be covering in my continuing series of articles on the exciting and potentially lucrative world of forex trading.

About the Author

Andy Williams is a freelance writer who regularly contributes articles for Vantage FX, leading Australian Forex and MetaTrader 4 Brokers providing online Forex trading services.