Forex trading is essentially the buying and selling of currencies from
around the world on a centralized foreign exchange system. The basic means
of making money in this area is to capture the differentials in currency
For example, if you purchased Japanese Yen you may be able to trade 104 Yen
for every dollar. If the Yen then moves up in value against the dollar, you
can buy back into the dollar at a better exchange rate.
Foreign currency trading is done in lots of $100,000. While this sounds
daunting, the foreign currency exchange system allows high margin rates. Of
course, margin increases your exposure to loss, so you really have to know
what you are doing.
One recommended way to get around this is to trade a mini-Forex account and
to use a Forex
trading software package. This
option allows you to trade in $10,000 lots, and with the high margin
allowances in the Forex, you could make trades with as little as $100.
As you gain exposure to the Forex trading business, you will notice the
frequent use of the word "pip." The Forex market trades currency prices in
pips. A pip means "percentage in point." In the Forex world this pertains to
the fourth decimal point, which is equal to 1/100th of 1%.
One cautionary note about small trade sizes however, is that you will need
bigger pip differentials to make a decent profit.
Currencies fluctuate for a variety of reasons, and predicting these
fluctuations can be accomplished with technical analysis, and observation of
current events, politics, and the economy of the country whose currency you
are interested in.
Many traders choose to focus their efforts on one foreign currency and look
and sell signals by
trading the dips and swells of that currency.