Unless you’ve been under a rock lately, you know that Forex trading is one of the hottest investment strategies out there right now.

But few of us mere mortals really understand what Forex trading is, and if it’s right for our investment strategy. What the heck is Forex, anyway?

“Forex” stands for foreign exchange; it’s also known as FX. In a forex trade, you buy one currency while simultaneously selling another – that is, you’re exchanging the sold currency for the one you’re buying. The foreign exchange market is an over-the-counter market.  Currencies trade in pairs, like the US Dollar / Japanese Yen (USD/JPY) or Euro-US Dollar (EUR/USD).   Unlike stocks or futures, there’s no centralized exchange for forex. All transactions happen via phone or electronic network.  You’ll use a broker to facilitate the trade.

Who trades these currencies, and why?

Daily turnover in the world’s currencies comes from two sources:

• Foreign trade (5%).  Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.
• Speculation for profit (95%).  Most traders focus on the biggest, most liquid currency pairs. “The Majors” include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.

As a result, Forex is the world’s most traded market, trading 24 hours a day, with an average daily turnover of US$3.2 trillion.  Forex is a true 24-hour market running from Sunday 5 PM ET to Friday 5 PM ET.   Forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.   Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur – day or night.

Understanding Forex Quotes

Reading a Forex foreign exchange quote is simple if you remember two things:

• The first currency listed is the base currency.
• The value of the base currency is always 1.

As the centerpiece of the forex market, the US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency. When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.  In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.

Forex Lingo

Like any market, Forex has its own language – here’s some of the terms you will hear which you may not be used to:

Cross currencies - Currency pairs that don’t involve USD at all are called cross currencies, but the premise is the same.

Bids, asks and the spread - Just like other markets, forex quotes consist of two sides, the bid and the ask:

• The BID is the price at which you can SELL base currency.
• The ASK is the price at which you can BUY base currency.

PIP’s - Forex prices are often so liquid, they’re quoted in tiny increments called pips, or “percentage in point”. A pip refers to the fourth decimal point out, or 1/100th of 1%.  For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.

Play money to get started in Forex trading

Several Forex brokers offer free “learning” accounts to help new investors get started.  Zecco offers a free Forex Practice Account  that lets you play with $50,000 as you learn the ins and outs of Forex trading.  With this account you get:

• Easy-to-use, practice version of the Zecco Forex trading platform
• $50,000 in virtual funds – trade risk-free
• 200:1 leverage
• Real-time quotes in 37 currency pairs
• Powerful charting
• 24-hour news headlines
• Daily and weekly forex research
• 24/6 support by phone and live chat

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