Foreign Exchange Basics - What You Need to Know

Want to understand the foreign exchange basics? Then you need to know about the currency trading market: what it is and how it works.

There are many different terms used for the currency trading market. It is also known as the foreign exchange market, usually shortened to forex or fx. These terms are all used to describe the international markets where currencies are sold and traded.

The forex market is situated in the financial centers of nations all over the world. Almost every nation is involved in currency trading so there is always trading going on somewhere, except on weekends. On Monday morning the market opens in Sydney, Australia and then it moves around the world as business hours begin in different countries. Because of the time zones, it is always open 24 hours a day through the week until it closes for the weekend at 4 pm EST Friday in New York.

The history of currency trading is short. From the Second World War until the 1970s, world trade operated what was called the 'gold standard' which gave every currency a set value against the US dollar. The values did not change. The aim of this was to maintain stability in the world economy.

But during the 1970s the gold standard was abandoned and currency values began to fluctuate - not only against the dollar, but against each other too. The banks quickly realized there was money to be made by trading the different currencies, buying low and selling high.

This meant that every currency became something similar to company stock. If a country is doing great then its currency value will be high. If it is not doing well, the value falls, just like the value of company stocks goes down when the company is doing badly.

In the early days of the forex market there was not much potential for the average private individual to join in the foreign exchange trading bonanza. Even now, most of the market is dominated by larger financial institutions like banks and investment houses.

However, with the rise of the internet it has become possible for people like you and me to become players in this huge market, which has a total transaction value of around $2 trillion dollars a day. More and more people are using their home computers to trade through an online brokerage account. This way you can trade with only a small account balance and there certainly is money to be made.

With the markets being open 24 hours a day, it is impossible to watch them all of the time. But you do not want to miss a trade. So most people use automated forex trading systems or robots that are connected to the internet 24 hours. You can start out with a demo account for practice and when you understand the foreign exchange basics you can set up your system to trade for real.