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Chapter 1- What Is Forex Trading And How Does Forex Trading Work?

The Forex trading industry is rapidly gaining headway as many hobbyist investors and professional investors alike are lured in by the breakneck speed and instant results. While the underlying mechanism of Forex trading is somewhat simple, in practice the market is very complex. It is important to understand Forex trading before you get involved, as it is a market that moves quickly. A poor investor can lose everything in a matter of minutes, not days like in the stock market.

To understand Forex trading, consider the fact that you've probably already engaged in a Forex trade on your own without realizing it. Forex stands for "foreign exchange," and it's what occurs any time money in one denomination is traded to another denomination. Let's discuss the most common scenario for a Forex trade. Consider that you're travelling to another country for a vacation, and you find out that currently one US Dollar (USD) is worth two of the Other Country's Dollars (OCD). So you then trade 1,000 USD for 2,000 OCD. You spend two months in the other country and, somehow, you still have 2,000 OCD when you're heading back (maybe you did well in some gambling). At this point, it's very unlikely you'll get 1,000 USD back. That's because currency rates fluctuate constantly. It's possible you'll find out your 2,000 OCD is now worth 1,500 USD, and it's also possible you'll find out your 2,000 OCD is now worth 500 USD. This opportunity for gain and loss is the basis of the Forex market.

Of course, Forex traders don't go to the bank and physically change money; they use brokers that allow them to trade units of money through the internet. These brokers often allow transactions as low as a single unit of currency. Trades occur through these brokers near instantly, and the changes in the market can be continuously tracked and graphed online.

Those that know the stock market may feel that they have an edge in Forex trading, but Forex trading is actually significantly different from traditional stock trading. For one, most Forex trades are short term trades, and long term positions are incredibly rare. The Forex market is also slightly different because there are very few currencies that are actively traded, and most traders focus on a set of two or three specific pairs, such as EUR USD or GBP USD. This is far different from researching and selecting from a high volume of stocks. The Forex market is also a 24 hour market that rarely closes, meaning that trading goes on continuously.

Forex trading can be considered more accessible to the hobbyist investor because the system itself is relatively simple, and because it's easy to start trading Forex with a small initial investment. That doesn't mean that the market strategies are simple, however, just that the actual trading platforms and the philosophy behind the market are easier to understand. As in all high risk investments, more investors will lose money than will gain a profit.

Automated Forex trading is a subcategory of Forex trading that has gained a lot of criticism. With this type of trading, the trader uses a computer program that automatically trades for them. The computer decides when to initiate these trades based on historical data, and some of these programs have shown remarkable results. However, most people will already have realized the big problem: historical data cannot predict future market results. This means that some programs will perform remarkably well for a few months and then suddenly tank.

There are many online Forex trading seminars and tutorials to teach anyone the basics of Forex trading. Research and consistency is critical to succeeding in the Forex industry, so many Forex brokers offer demo accounts where new traders can practice with fake dollars. This can be a great way to practice new strategies and learn about the way the market works. Other Forex experts offer trading signals, which are alerts that tell you what trades to place and when. These signals can be valuable, if you have enough of a foundation of knowledge to understand them.

When considering entering into Forex, you should test many brokers and many Forex trading platforms. It's critical to get a broker that features low spreads, because these spreads can actually make or break trades in many strategies. It's also important to get a broker that offers an intuitive trading platform, because your trading platform will become your most valuable tool and best friend. A clunky or unresponsive trading platform can lead to death, especially for those with strategies that involve very fast trades.

Forex is a unique and fascinating market, but it is not a money making or get rich quick scheme. It is a huge, international market that needs to be respected and understood before it can yield any positive results.