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If you are considering becoming involved in foreign exchange trading (also known as forex and FX trading), you would be wise to learn how trading is done in the currency markets. No matter if you are an individual trader or an international bank, the reason for trading is always the same: to earn as much revenue as possible in as short a time span as one is able to.

Unlike individual stock markets which are located each in its own country, the overall forex market is worldwide in size and far bigger in terms of the amounts of money involved. The core idea behind all forex trading is to buy and sell currency pairs in the hope that the value of that pair will get higher so that it can be sold at a profit. An example of a currency pair would be the US dollar vs. the Euro (USD/EUR). The opposite pair would be the Euro vs. the US dollar (EUR/USD). These pairs will always move in opposite directions: If the USD/EUR pair is rising in value, then the EUR/USD pair will be falling in value. In this way, the Forex market is similar to the stock market: The goal of investing in either market is to buy low and then sell high.

The central banks control the money supply and interest rates worldwide. They are located in London, New York and Tokyo. These locations are where the majority of forex trading happens. Greater than half of all forex trading involves banks, large and small, with the biggest banks doing most of the trading. Most forex trading is done between banks and is referred to as “interbank” trading.

At the end of each business day, any bank has large amounts of money that will not be required by its customers until the next business day. During this “overnight” period, many banks customarily engage in forex trading with this money in hopes of having more money in the morning than they did at the end of business the night before. If they are successful in doing this, they will have more money to lend the following day.

World events such as the recent earthquake and tsunami in Japan will cause currencies to abruptly rise and fall with respect to each other. As one currency declines, another will rise. For instance, if the US dollar is “weak” this means that another currency will be “strong” and vice versa.

In recent years, personal investors (also known in the trade as “spectators”) have found out that they can make money in foreign exchange trading just as the biggest banks do. The difference is in the relative size of the investments they make. For a single investor to participate, he or she will have to associate themselves with a foreign exchange broker who will make the trades on their behalf in exchange for a commission.

As a single person, there are 2 ways to participate: Make all the trading decisions by yourself (very risky for beginners) or choose to follow the trades of a professional trader you have come to trust. If this is your choice, then it is essential that the trading signals you are being presented with match the trades actually being entered by the professional who is selling you the signals. This is very often not the case, so be careful. The old saying, “Put your money where your mouth is” pertains in this case.

Finally, be aware that individual investors, just like the banks and commercial companies can face huge losses and make enormous profits overnight. For this reason, forex investing is neither for the unaware nor the faint-hearted.

Bob Gillespie

About the Author:

Bob Gillespie writes on many subjects including forex trading. He is a full-time Internet marketer and author who lives on the island of Maui in Hawaii. Learn more about forex trading at Bob’s blog at:

http://forex-trading-system.inetwyoming.com

Other blogs of possible interest:

http://forex.inetwyoming.com

and

http://fx-trading.inetwyoming.com
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