Welcome To ‘Learn Forex Trading’

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Welcome to Learn Forex Trading

Welcome to 'Learn Forex Trading'

Hi, and welcome to the first free installment of our multi-part training course, called ‘Learn Forex Trading’.

Yes, we know the title is not exactly snappy or ‘showbiz’, but we’re fine with that. We’d much rather give you the facts, and teach you from step one day one onwards, than present you with a pile of razzmatazz and no actual substance.

Over the coming days and weeks, we’re going to be sharing with you a hundred and one lessons to help you learn forex trading.

Starting today, with ‘Learn Forex Trading’ lesson #1, ‘An Introduction to Forex Trading’:

INTRODUCTION TO LEARN FOREX TRADING

I am sure most of us have heard of the word “FOREX”. But what exactly does this mean? FOREX refers to FOReign EXchange. Forex trading therefore simply means the business of buying and selling currencies. So how did the Foreign Exchange market originate, and why is it a huge opportunity for everyone to generate a serious second income?

After the second world war and up until 1971, the prices of a given currency were fixed and tied to the price of gold. Prior to this time, a piece of paper currency issued by any world government represented a real amount of gold held in a vault by that government. For the US government, this rate was fixed  at $35 to 1 ounce of gold.

With this benchmark rate, other countries knew the rates of their currencies against the US dollar based on their rates as tied to an ounce of gold. This system had a lot of drawbacks because economies did not develop at the same pace and also had different economic and political factors at play. For example, the US was hit by inflation and its value against that of gold could not be supported at that price. Eventually, the fixed rate regime was abandoned altogether by the Richard Nixon-government and the floating system was introduced. Under the floating system, the rate of a currency against another currency (and even gold) was determined purely by the dynamics of supply and demand. This marked the beginning of currency exchange, or forex trading as we know it today.

From 1971 down to 1997, currency trading was the exclusive preserve of banks and major financial institutions. The deregulation of the industry in 1997, and the advent of the Internet and the consequent introduction of electronic trading platforms, allowed individual traders participation in the forex market.

This has made the forex market the most liquid financial market in the world with a current daily trading volume of $4trillion, according to the Bank of International Settlements (BIS). That’s $4,000,000,000,000 (twelve zero’s!)

Compare this trading volume with that of the other major financial markets.

courtesy of babypips.com

Forex is generally traded in three major ways:

1)      The ‘spot’ market

2)      The ‘forwards’ market

3)      The ‘futures’ market

Most electronic trading of forex as done today is in the form of “spot” trading, where currencies are bought and sold according to the prevailing market price. The transactions are two-way transactions in which one party delivers an agreed amount of one currency to the other party and receives a specified amount of the other currency (called the counter currency) at an exchange rate value agreed upon by both parties (the prevailing exchange rate). Once the position is closed, the settlement is in cash and this is done immediately.

In the forwards and futures markets, currency transactions are done based on contracts with future delivery and settlement dates.

Now we’ve got a high level understanding of what forex trading is all about, let’s take a look at the main currencies that are traded on the ‘spot forex’ market.

TRADED CURRENCIES

We”ve pretty much all heard of the G-7 countries. These are the world’s most industrialized nations and their currencies constitute the major traded currencies. These currencies are:

Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro Eurozone states Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Swiss Franc Swissy
CAD Canada Canadian Dollar Loonie
AUD Australia Australian Dollar Aussie
NZD New Zealand New Zealand Dollar Kiwi

In addition to these currencies, there are other emerging market currencies that play a significant role in world economics. These currencies include the South African Rand (ZAR), The Singaporean Dollar (SGD), the Swedish Krona (SEK), the Norwegian Krone (NOK), the Chinese Yuan Renminbi(CNY) as well as a host of other currencies.

These currencies are paired against each other with the first currency in the pair being the base currency and the second currency called the counter currency.

The currency pairs are classified into major pairs and minor pairs as follows:

MAJOR PAIRS

Pair Countries FX Terminology
EURUSD Eurozone/US Euro dollar
USDJPY US/Japan Dollar yen
GBPUSD United Kingdom/US Pound dollar
USDCHF US/Switzerland Dollar swissy
USDCAD US/Canada Dollar loonie
AUDUSD Australia/US Aussie dollar
NZDUSD New Zealand/US Kiwi dollar

If you notice, all the pairs above contain the US dollar. This reflects the dollar’s importance in global economics (and of course that of the US in world politics).

The pairs that do not have the USD are known as the cross currency pairs or simply the crosses. Examples are:

Pair Countries FX Terminology
EURJPY Eurozone/Japan Yuppy
GBPJPY United Kingdom/Japan Guppy
CADJPY Canada/Japan Loonie yen
EURCHF Eurozone/Switzerland Euro swissy
EURGBP Eurozone/United Kingdom Euro pound

You will come across these currencies very soon when we delve into more technical aspects of forex trading proper.

Watch out for the next newsletter where we will talk about what you need to start forex trading.

For now though, we hope you’ve enjoyed your first ‘Learn Forex Trading’ lesson.

One Response to Welcome To ‘Learn Forex Trading’

  1. Clearly understandable – so far so good !

    W.John Evans
    November 29, 2012 at 9:48 pm
    Reply

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