Samuel Rees - Forex Trading: THE BIBLE This Book Includes: The beginners Guide + The Crash Course + The Best Techniques + Tips and Tricks + The Advanced Guide To ... Immediate Cash With Forex Trading (Volume 9)

Forex trading uses currency as the trading vehicle. Forex is short for foreign exchange, also known as FX and currency trading. It is an investment market, where you trade money, known as currency, where you do not trade USD for USD, but USD for Euros, Yen, Australian dollars, and numerous other currencies used in countries around the world.

You make money trading in the forex market by determining which currency in a pair will move up or down in value faster or in the opposite direction from the other currency in the pair.

EUR/USD is the euro and US dollar currency pair. The EUR is called the base currency, and it is always equal to 1. The USD is the quote currency and it will change in value against the EUR. If you see 1 EUR/USD= 1.11967, it is read as for 1 euro you will receive 1.11967 US dollars in an over the counter trade.

If you walked into a bank and asked for 100 euros to be exchanged into USD, you would be given $111.99 dollars. If you walked into that same bank and said you need to exchange $100 USD for euros, you would be given 89.29 euros based on the exchange rate mentioned above.

This type of currency exchange is common and what travelers do each year, but it is not how investors make money in forex trading. The money is actually made based on the bid and ask price or the buy and sell price of a currency pair, and whether the currency pair is going to gain or lose in value.

Image 1: Bid/Ask Chart

The chart shows you the most typical way information is presented. You will see what currency pair the quote information is about and the time the quote is being provided. There are also boxes that show the low and high for the day, before giving you the sell and buy or ask and bid price for the currency. Some charts just offer the currency pair and the bid/ask price.

It is your job as a trader to determine if you want to sell euros and buy USD because the USD will become stronger or if you want to buy euro and sell USD because the USD will become weaker, against the EUR.

The point that many traders become confused on is what strong or weak means in a currency pair. The easiest way to define this is to look at how far your base currency goes in an exchange.

In the EUR/USD pair, you can use fewer EUR to gain more USD. However, you need more USD to gain fewer euros. Now, lets look at the exchange above again. You gained 111.99 USD for 100 euros, but only 89.29 euros for 100 USD.

So, lets now answer the question of what has more value. You traded less euros to get more USD. You traded more USD to get fewer euros. In this equation your euros hold more value against the USD because the euro goes further when traded in for USD. When you travel, you want your domestic currency to hold more value, so you spend less of it. When you come back from your travels, you want your international currency to provide you with more of your domestic currency.

If you think in those terms, then it will be easier to understand why value is so important to the forex market and retail traders. You are considered a retail trader, but you are also not the only player in the market.

You can also remember these little hints:

1. The base currency is stronger than the quote currency equals a rising currency pair. (The price will be rising on a chart)
2. The base currency is weaker than the quote currency equals a falling currency pair. (The price will be falling on a chart)
3. The quote currency is weaker than the base currency equals a rising currency pair. (The price will be in an upward trend on the chart) *
4. The quote currency is stronger than the base currency equals a falling currency pair. (The price will be in a downward trend on the chart) *

*Upward and downward trends will be explained in technical analysis.

Why Do Currency Prices Change?

Understanding why currency prices change comes down to predicting how they are going to move under certain conditions. Once you, as a currency trader, are able to predict currency movements you are able to invest for a profit.

When you learn about strategies like fundamental analysis you are going to be able to answer the following:

• What drives currency prices? The simple answer is supply and demand, but it requires a more in depth discussion to fully grasp currency movement.
• Who drives the currency prices? You, big banks, corporations, governments, and the interbank system are largely responsible for currency price movements. Each has a cog to play in the wheel of forex.
• What are the individual personalities of the currencies? All currencies have their own general forces that drive them to move, which can vary due to economic situations and government involvement.
• How will currencies react to economic reports/announcements and news? Economic reports can change a pattern in currency movements depending on what they are, when they happen, and the scale of the news.