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Forex Trading Basics for Beginners

The growth of the foreign exchange market has led many people to become interested in the basics and mechanics of forex trading. What exactly is forex trading and how is it done?

Forex, or foreign exchange trading, is the buying and selling of currencies between different countries. Unlike commodities and stock trading, forex trading is not the exchange of products or stocks, but of money. You may earn or lose money, based on the existing exchange rates between the two currencies.

The forex market is the single biggest market in the world, several times larger than the New York and the NASDAQ stock exchanges, in terms of daily trading volumes. With its size, the forex market has the capability to overtake stocks and treasury bonds as the best, and safest, investment for the individual investor.

The main difference between forex and the stock exchange is that the latter is an investment on a company, or several companies, while forex is an investment on the economy of a country. When you buy or sell a currency in a forex market, you are actually betting on the economic well-being of that nation.

How does forex work? Let's consider this example: You, as a forex trader, think that the value of the US dollar will increase in relation to the Japanese yen. You immediately perform a forex transaction, selling your Japanese yens in exchange for US dollars. If your predictions are correct, the US dollar will strengthen while the Japanese yen decreases in value, leaving you a significant profit from the trade.

Sounds easy, does it? Well, don't be fooled by the seemingly relative ease of the forex market. It is very difficult to make accurate forecasts on the fluctuations of the various currency exchange rates because of the underlying factors that contribute to these changes. The fluctuations of the exchange rates are unpredictable and requires a lot of study and research.

For this matter, you must not only study how the forex market works, but also the economic conditions of the countries whose currencies you are dealing in. If you are trading in US dollars and Japanese yens, you should learn more about the economies of the United States and Japan.

Take note that forex is a global market involving almost all countries of the world, so you should not focus on one pair of currencies alone. You can trade using the lesser-known currencies but for starters it's best to concentrate on the seven major currencies.

The seven major currencies of the forex market are the US dollar (USD), the Euro (EUR), the British pound sterling (GBP), the Japanese yen (JPY), the Swiss franc (CHF), the Canadian dollar (CAD) and the Australian dollar (AUD).

Forex trading can mean nice profits for the individual investor if done wisely and correctly. Be sure to brush up on your knowledge of the forex market, as well as the economic conditions and currency trends of foreign countries, before you get involved in forex trading.