What is Forex?

How does Forex trading work?

In the Forex market you can buy or sell one currency for another. When you buy a currency, you are said to be “long” in that currency and when you sell a currency, you are said to be “short” in the currency. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies in order to make profits. Placing a trade in the foreign exchange market is simple and the mechanic of a trade are virtually idential to those found in other markets. Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. An open position is one that is live and ongoing. To close out your position, you conduct an equl and opposite trade in the same currency pair.

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the “basis” for the buy or the sell. For example, if you BUY EUR/USD you have bought Euros (which means, you simultaneously sold dollars). You would do so in expectation that Euro will appreciate (rise, or go up) relative to the US dollar.

First, the trader should determine whether they want to buy or sell. If they want to enter a short order -  whereby they will profit if the exchange rate falls — they simply need to SELL. The opposite holds true for traders who enter buy orders: they can simply BUY, and thus will profit if the exchange rate goes up.

A trader purchases 10,000 Euros when the EUR/USD rate was 9600. And a couple of weeks later,  when the value of US dollar rose and the trader exhanges his 10,000 Euro back to US dollar when at the market rate of 11,800. In this example, the trader earned a gross profit of $2,200.

However, Forex trading can be very complicated and risky at the same time. Therefore, it’s no surprise that so many people are turning to Forex trading indicators (sometimes referred to as trading robots) to handle their money, their trades and their risks and rewards in general.

Sadly, even the most powerfully advanced Forex trading robot is not going to automatically make you a millionaire overnight.

This is because no matter which way you look at it, trading is always attached to some form of risk, no matter how big or small. Of course, the better the trading robot, the lower your risks. But ultimately, if you want guaranteed return on investment from putting money into something, then you’re better off applying for a high interest bank account (which, as I write this, is actually risky in itself due to the poor economy!).

Despite these obvious warnings, there is no denying that sheer potential of money to be made by any single individual from anywhere in the world is too much of a temptation to simply ignore.

Knowing the basics before you get started with help you tremendously, even if you do decide to use a software program to automatically trade for you.

Before we discuss the right software for the job, let’s take a quick look at the basic principles of Forex trading…

Forex trading is based on indicators. Indicators tell you when prices are moving up and down so that you can spot opportunities as they arise (allowing you to buy low and sell high). There are two types of indicators in Forex trading…

These follow trends such as moving averages. These types are the easiest to use for Forex trading to see trends going up and down in the markets.

Moving averages are better suited to markets that experience trends, which there are many.

Moving averages can be very flexible and allow you to make decisions on your trades outside the purely technical factors that other trading indicators are based on.

These types will analyze the velocity or momentum of price movementBoth these types of indicators define and organize the patterns into an understandable set of tools which can be used as quick reference for your trades.

They essentially signal where the strong and weak points are in differing markets and ultimately spot potential trading opportunities for you.

They are best applied to non-trending or sideways markets and basically use an oscillator to display the continuous rate of rise and fall in market prices to show patterns and trading opportunities. They essentially help to reveal triggers where a market has been flat for some time.

By applying both indicators to spot potential trading opportunities, you will see the best results in your Forex trading activities.

Although many are put off by the complications of Forex trading, a simple piece of software can handle such confusion and deal with the different types of indicators to pick out wining trades for you, automatically.

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