In this lesson I am going to explain a few basic concepts about the nature of the foreign currency market (Forex). I want to remind you that this is not a comprehensive introduction to the Forex. I am simply trying to go over the crucial basics. As you read through this lesson (and the following lessons) I want you to do one thing. Just read. I do not want you to take notes or worry about remembering any specifics. If you do not understand something, skip it. You have these five lessons as a resource, which you can review later. A lot of people will spend several pages introducing the Forex by giving an
historical perspective. For a Beginning Forex trader, this is a waste of time. It is interesting to learn about the who, what, when, where and why of the Forex.
Historical knowledge about the Forex will not help you to become a Forex trader! I will make one important point before moving forward. The Forex plays a vital role in the world economy and there will always be a tremendous need for the Forex. International trade increases as technology and communication increases. As long as there is international trade, there will be a Forex. The Forex has to exist so a country like Japan can sell products in the United States and be able to receive Japanese Yen in exchange for US Dollars.
The easiest point to begin discussing the Forex is by comparing it to the stock market. Most people have a basic concept of how the stock market operates. The stock market is where shares of a company (stock) are exchanged (i.e. bought and sold) by investors. The key principle in stock market trading is to “Buy low & sell High.” I don’t mean to sound cliché, but it is true.
In the stock market the most common way of placing an order is to buy a share of stock, and sell it later at a higher price. This is essentially what all businesses do. They buy something at one price, and attempt to sell it at a higher price. The Forex is no different. In the Forex market, currencies are always traded in pairs. Since you have to trade one currency for another, the transactions always involve a “pair” of currencies. The goal of Forex trading is to “buy” the “currency pair” at one price, and try to sell it later at a higher price. There is also another way to make money in the stock market. This “other way” is called “short-selling.” Short-selling is simply when you SELL the stock FIRST at one price, and then you try to buy-back the stock at a lower price. The goal does not change - you still want to buy low and sell high. With short-selling, you just SELL the stock FIRST. Short-selling has a much larger risk in traditional stock investing. There are many rules that limit short-selling to serious market professionals.
The Forex does not impose any limitations on short-selling. The risk on shortselling in the Forex is no different than the risk of buying in the Forex. I know you may be asking “Why isn’t there any risk or limitations on short-selling in the Forex, Brian.” My answer to you friend, is that the rules for the Forex are different. I will explain how this works in lesson #4. Until you get to lesson #4, just realize the
rules in the Forex encourage short-selling as much as regular buying. Now I have reached the part of this lesson that excites me the most. This concept will also benefit you more than any other concept you will ever learn about the Forex. I have a question for you friend: How often do you think that the
foreign exchange rates change? Think about this for a moment before reading on. Have you thought about it yet?
OK friend, how often do you think they change? They have to change sometimes, right? Did you say monthly? How about Daily? You might have guessed hourly, but you would still be wrong. I hate to tell you that you are still wrong if you guessed that they changed every minute. The true answer is: Forex prices change every second to every fraction of a second! You have just been exposed to a great concept. Read it again. I know you probably already knew this fact. Even though you already know the answer it will benefit you to think of it deliberately. The only thing you need to know for sure is that the currency exchange rates will continue to fluctuate continuously while the Forex is open. Opportunities to make money are created continuously. You do not have to worry about how much these rates change at this point. The rates change by varying amounts at various times. The important idea that you need to understand is that as the prices fluctuate every second, you have new opportunities developing to “Buy Low & Sell High”. The Forex even allows you to short-sell. You can make money in either direction.