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About the FOREX Market

For newcomers to the FOREX market...

Making money from the FOREX market is one of the fastest and most lucrative investment vehicles we know. Some of the worlds wealthiest individuals make tremendous fortunes every day in this market.

Luckily, anyone can get into this lucrative market with as little as $400 and begin watching with excitement as that small investment grows exponentially.

The FOREX market is quite simple. You've heard of the stock market right? The two markets are similar in that traders look at charts to follow action in the market. They also watch the news, have a select group of technical indicators and methods of fundamental analysis that tell them when and why to buy or sell, and they make projections as to when to get out... locking in profits as they go.

In the stock market traders buy stocks of different companies. There are always traders looking to sell their existing stock or to buy more, based on what they believe the market is doing and more specifically, what's happening with the company in which they own stock. A broker connects the buyers and sellers together.

In the FOREX market traders buy or sell currencies. There are always traders looking to sell their existing currency to buyers and buy currencies from sellers. Their decision to buy or sell is based on what direction they believe the value of a currency is heading and more specifically, what's happening economically to affect that currency. A broker connects the buyers and sellers together.

On a daily basis the NASDAQ and New York Stock Exchange sees about $57 Billion combined flowing back and forth between buyers and sellers of stocks. In comparison, the FOREX market sees over $1.9 Trillion per day!!

The significance of this massive difference in volume is that it greatly affects a traders ability to make tremendous profits much faster in the FOREX than in the Stock Market.

When you get into a stock trade it can take days, weeks and months to see a decent profit due to the more limited volume of money pushing that stock price in your favor.

When you get into a FOREX trade it can take well under 24 hours, and many times just a few hours to realize those same profits... and then some. Why? Because there are so many more buyers and sellers pumping money into this market that it takes far less time to affect the value of the currency you've bought or sold.

The currencies traders buy and sell are paired with other currencies. One example of a pair is the Euro and US dollar. The pair is depicted as EUR/USD. When you choose to buy or sell, you are doing so to the first currency in the pair (EUR), and the opposite to the second currency (USD). So if you sell the Euro you are in turn buying the US Dollar.

The real time value of each currency in the pair is noted by your broker. There are always 4 decimal points in a price quote, with the exception of the japanese Yen. An example of a price quote for the EUR/USD pair is 1.3245/1.3215. The first price is what you can sell one Euro for and the second price is what you can buy 1 Euro for. So you can sell 1 Euro and obtain 1.3245 US dollars or buy 1 Euro for 1.3215 US dollars.

The price of a currency moves up or down one "pip" at a time. A pip is the smallest increment in price a currency can move. It is the 4th decimal point (1/100th) in the quoted price.

You don't simply get to choose how much of a currency you want to buy or sell, such as $100, $150, etc. Instead, you buy or sell in "Lots".

One lot for a standard size account is $100,000. For a mini account it is $10,000.

Now this does not mean you need to invest $100,000 or even $10,000 in order to open a trading account. Through the use of "Leverage" you can actually go as high as 400:1 depending on which broker you use. Lets discuss the more standard 100:1 leverage since it carries much less risk.

Using 100:1 leverage, this means you can actually trade $100,000 with just $1,000 of your own money! Most brokers will allow you to start with as little as $400, which through the use of 100:1 leverage allows you to control $40,000.

Leverage enables you to control massive amounts of money with very little of your own. This can lead to very large profits quickly. It can also lead to large losses IF you don't use Stops when you're trading. "Stops" are discussed in the Trading section.

What leverage does is allow you to take those very tiny 1/100th increments in profit as price moves one pip at a time in your favor, and multiply them times 100 or more depending on how much leverage you are using.

Let's look at an example of a profitable trade...

The pair is the US dollar and the Swiss franc. The pair is shown as USD/CHF. The current price quote is 1.3050/1.3053.

We feel that through technical analysis the US dollar is going to increase in value against the franc. We therefore want to buy US dollars at their current low price and sell them back after they have increased in price. In the end, if we are correct the dollars we'll sell back will buy us a lot more francs than we started with.

So we buy 1 lot ($100,000 US dollars) at the current price of 1.3053 francs per dollar.

Let's say we were correct and the dollar increased in value by 50 pips. So now the current price for the pair is 1.3100/1.3103.

We are happy with a 50 pip gain and decide to close our trade by selling back the $100,000 US dollars that we bought and retrieve our francs. The selling price is always the first price in the quote, which is now 1.3100.

So we've locked in our 50 pip profit which is 0.0050 given that a pip is the last digit in the price. Multiplied by the $100,000 we just sold that's a $500 profit! Note that each pip is worth $10 because a pip is 0.0001 and we are controlling $100,000.

Of all the currencies traded, 6 of them are referred to as the "Majors" because they attract 85% of the attention... or money in the market. These currencies are the US dollar, Euro, Swiss franc, British pound and the Yen.

The common goal when buying or selling any investment instrument is to profit. So clearly an investor tries to avoid selling for less than they bought for. You wouldn't want to buy a house for $250,000 and sell it for $245,000, right?

When you buy a currency you are anticipating that it's value will go up against the second currency it's paired with. When you later sell the currency back, you automatically buy back the second currency in the pair... only with the increased purchasing power of the first currency which you are now selling you can buy a LOT more of it!

Think of buying a house. Your money is in the bank earning you very little. A $250,000 house in a new subdivision is increasing in value rapidly. So you buy the house and give up (lets use the word "sell") $250,000 of your money. The house appreciates to $270,000 so you sell it back to another buyer and now you have more money than when you bought it. Your started by giving up $250,000 and after selling the house you bought, you now have $270,000.

Unlike the house example where you can physically touch what you have purchased, and if you had that much in cash you can physically hand over your $250,00 and later take back your $270,000, the FOREX market is a "virtual" market.

You choose a FOREX broker and transfer money from your bank to theirs. Once your account is established you begin buying and selling currencies. You buy currencies but don't take physical control of them, and you sell currencies that you don't already own!

When you sell a currency you don't already own, what you are in fact doing is buying the second currency it's paired with. There is then the understanding that at a future date you will be selling back that second currency... and therefore buying back the currency you originally sold.

No matter what currencies you are buying and selling, profits or losses from your trades are converted into the currency of your account. So if you have a US dollar account, all profits and losses are defined in US dollars. You are free to reinvest your profits or withdraw any portion of your account at any time... right back to your bank.