Forex 101 Series: Introduction

I am thinking about what to write today and I just can't put my mind on a topic. This is mostly because I'm already mentally and physically tired from my long and stressful day. I really don't want to go a day without posting an article this month, as I've failed to achieve this in months past. Then I remembered a book I was writing and later left behind. So, I just thought I'll start posting it here. Maybe this will help me complete it. So, here we go...

Introduction

Forex is an abbreviation of the phrase "foreign exchange". It is simply the trading of one currency for another. Hence, forex trading is simply the exchanging of one currency for the other.

There are multiple reasons why people engage in forex and different ways they do so, but this material will focus on retail trading. It is worthy of note though, that majority of forex transactions are done by banks and institutional investors.

Trading forex is about same as trading shares of a company, except that the company in the case of forex trading is the country whose currency ( share ) you are betting on. If a company whose share you bought is doing well and business is good, their share will continue to be in demand and hence continue to increase in price. If you were to sell those share after a while, you would be making a profit. This is basically how forex trading work. When you buy one currency pair, you are betting that the economy of the base currency country will do better against the currency of the quote currency country, and when that happens the base currency exchange rate against the quote currency will increase, and as such you make profit.

Forex Pairs

In forex trading, currencies are trading in pairs ( EUR/USD, GBP/USD, XAU/USD). Each currency pair has a base currency, being the first currency in the pair and the quote currency, the second in a pair.

These currency pairs are used in forex trading because trading forex is not 100% same as trading stock. When you buy a currency in forex retail trading, you are not taking possession of that amount of the currency, rather you have entered a contract with the broker to give/take a certain amount of one currency for another at any time.

For example, if you enter a buy on the EUR/USD pair, you have technically collected a certain amount of EUR from your broker and when you decide to close or sell the EUR/USD pair after some time, you have returned the EUR to the broker in exchange for USD. The difference between the exchange rate between the time you bought and the time you sold becomes your profit.

The trader takes advantage of the constantly changing exchange rate as well as the volatility and liquidity of the pair to make profit.

Note: This book was inspired by the simple to use tutorials on Babypips.com, not to mention multiple excerpts, so there might be a lot of seeming similarity.

Thanks for reading...