The Dummy’s Guide to Forex Trading

Forex is short for foreign exchange. According to Investopedia the definition of Forex is as follows:

[Forex is] the market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.

There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

Forex is the largest market in the world and anyone can trade. Here is a dummy’s guide to Forex trading.

Trading Twenty-four Hours a Day

Because forex markets are spread across the world there is always a market open twenty-four hours a day on all business days of the week. You can trade on any of these markets. However, depending on which currencies you trade one market of another will make more sense.

Picking a Currency Pair

The point of having Forex markets is to facilitate foreign trade. If a Japanese airline wants to buy a Boeing jet they will want to convert Yen to US dollars. Thus in Forex markets traders use one currency to buy another. They trade currency pairs. If you want to make money in Forex trading, what is the best currency pair to trade? There are major currencies and minor currencies. The major currencies are those of large economies and trade in high volume and liquidity. These are the US, Canadian and Australian dollars, the Yen, Euro, British pound and Swiss franc. The minor currencies are all of the rest. Trading is safer for beginners with major currencies such as the US dollar versus the Yen or Euro.

The Dummy’s Guide to Forex Trading Major Currencies

Because major currencies trade in high volume and with high liquidity it is commonly profitable to use statistical trading tools. This is called technical analysis of Forex currencies. To do this you need to be working at a trade station, a high speed computer with lots of memory. You will need software that is compatible with the broker who is your connection to Forex markets. You will need to learn how to use the software and how to trade profitably. This is commonly done via simulation trading using trading data that comes with the trading program. Day trading major currencies can be profitable but it requires continual attention to the market, solid trading strategy and discipline.

A Dummy’s Guide to Trading Minor Currencies

Minor currencies trade is lower volume than the majors and trading is not as liquid. That means you can get trapped in a position when the market moves suddenly. Experienced traders tend to trade minor currencies based on fundamentals and technical factors. We have written about trading the Colombian peso. This currency is strongly tied to the price of crude oil as Colombia derives most of its foreign currency from oil exports. This is an example of fundamental trading which works better for minor currencies.