A Brief Guide to Trading the EUR/USD – Chapter 1: An introduction to Forex

The purpose of this guide is to give you an overview on how to trade the Forex market with a special focus on the EUR/USD currency pair.

Forex or FX refers to the simultaneous buying and selling of currencies. It is an Over the Counter Market (OTC) operating 24 hours per day, 5 days per week.  The Forex market is the largest of all financial market with a trading volume amounting to roughly 3 trillion dollars per day. Trading operation runs from all the major financial centers throughout the world. Thus, the trading operations overlap into all the different time zones around the world.

In other words, Forex means the exchanging of one currency for another currency at the market exchange rate. These currencies are always bought and sold in pairs. For example, if you buy Japanese yen, you will always be selling US dollars for it. Thus, Forex currencies are always quoted in pairs like EUR/JPY; EUR/USD or GBP/USD. Not all currencies are equal in demand. Some currencies are traded more than others and those that are frequently traded are known as “Major currencies”.

These usually refer to currencies like the U.S. Dollar; Australian Dollar; British Pound; Japanese Yen and Swiss Franc. The lesser traded currencies are known as “Minor currencies”. The currencies of smaller or developing countries around the world are regarded as “Exotic currencies”.

Currencies that are normally traded as investment vehicles are normally confined to four major currency pairs. They are denoted by the sign EUR/USD; USD/JPY; GBP/USD and USD/CHF.

Previously, Forex trading was conducted only by the major commercial banks, hedge funds, central banks and multinational companies dealing with currencies for the purpose of facilitating trade. Today, with the advent of the internet and several market innovations, the small time retail trader is also able to participate in this market. Forex brokerage firms also offer several types of accounts to enable the retail trader to be able to trade in smaller lots than 100,000 units per lot.

Despite its fast development, the Forex market is largely unregulated. The rules regarding Forex trading are not clearly defined as trading crosses over international borders. Furthermore, those with huge risk capital like the banks and hedge funds can actually influence the market with their capital leverage. Therefore, anyone who is inexperienced in Forex trading will be wading in unchartered and often risky territories. Although the risk is high in Forex, those who take the trouble to educate themselves can easily find themselves making a fortune within a few weeks. And for those decide to jump into trading without educating themselves can find disaster looming over the horizon.

With regards to Forex Trading, traders are normally offered margin accounts with a high level of leveraging by the brokerage firms. The level of leverage can run up to as high as 300 to 1 and in some cases even up to 500 to 1. This implies that for every one dollar invested into trading, a trader can purchase between $300 to $500 worth of currencies. Therefore, if you decided to invest $1000 into Forex trading, you can trade up to $300,000 to $500,000 worth of currencies in the Forex market. This presents a huge opportunity for any experienced trader who knows how to utilize this facility. Nevertheless, one must never forget that leverage is a double edge sword. Your losses can also be multiplied many fold and you could end up losing more than your initial capital outlay. 

This is chapter number 1 out of 7. Read the rest:

Read A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair
Read A Brief Guide to Trading the EUR/USD – Chapter 3: Reasons for trading in Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 4: Forex Quotes
Read A Brief Guide to Trading the EUR/USD – Chapter 5: Fundamental Analysis for Trading EUR/USD
Read A Brief Guide to Trading the EUR/USD – Chapter 6: Technical Analysis for Trading Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 7: Conclusion