The Basics of Forex Trading

Filed under: Learn Forex Trading |

 

This article today is targeting towards people new to forex trading, so if you have been trading for a while, then you can probably skip this one.

 

Forex or ‘FX’, is short for ‘foreign exchange’, and it refers to the foreign exchange market, where traders trade one currency for another one in the hope of selling it back later at a better price.

 

Most people have some general knowledge of the stock market, and they understand that when a stock goes up, people make money, and when a stock goes down, they lose money. Therefore, when they see a forex chart, they often think that the same rules apply. However, nothing could be further from the truth.

 

An FX chart is an exchange rate, and it has nothing to do with whether a company is doing well or not. However, it has everything to do with how the economies of two different countries are doing.

 

What is different about a forex chart is that you can speculate on whether the rate will move up, or move down. This is much like taking longs and shorts on the stock market; and can be compared to making a bet on the direction of the market.

 

In forex, you are not buying shares in a company, but rather, you are purchasing money in a foreign currency – you are changing your British pounds or American dollars into Australian or Canadian dollars (for example). You do this when you go on holiday, but in the FX markets, you do this on a much larger scale by using leverage. By doing this, you can hope to make profits when the exchange rate moves and you change the money back to your own currency. However, you can of course lose money by doing this as well, so you need to formulate a plan and a strategy that has a market edge. One way of doing this is to use price action signals at significant areas of support and resistance.

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