Forex is also called "FX," and both are short for "foreign exchange." Foreign exchange doesn't get a lot of press like options, stocks and commodities. However, foreign exchange is in fact the biggest market in the world and it can offer investors a huge opportunity for profit, done right.



When you trade in foreign exchange, you don't trade in bonds or stocks. Instead, you trade in currency. Simply, you buy one currency and sell another. As exchange rates go up and down, you either make or lose money, depending on what you've traded.

With foreign exchange trading, you aren't investing in a single company or group of companies, as you might with mutual funds, for example. Instead, you're investing in a nation's economy. You are betting that the overall economic health of one nation will get better as compared to that of the second nation in your "currency pair," or the pair of currencies you are utilizing to trade.

As an example, let's say that you are dealing with the Japanese yen and the US dollar. Your research seems to tell you that the US dollar is undervalued and will increase in price, and at the same time, the Japanese yen is going to lose value. With this scenario, you would execute a trade so that you buy US dollars and sell Japanese yen. If you are right and the exchange rate rises, you make a profit. If you're wrong and the exchange rate falls, you'll lose money.

It sounds easy, but it's really not. Currency prices can be very difficult to forecast, because so many factors contribute to a shift in exchange rates. You also have to remember that you always trade in pairs when you do currency trading. In effect, you sell one currency while simultaneously buying another. Therefore, you can't just look at one nation's economy; you have to look at the economies of both nations you are working with.

Finally, you don't have to limit yourself to just one pair of currencies, such as the US dollar and the Japanese yen. In fact, there are many currency pairs you can work with. If you're just starting out, though, stick to the seven major currencies listed below:

AUD - Australian Dollar

CAD - Canadian Dollar

JPY - Japanese Yen

GBP - British Pound

CHF - Swiss Franc

USD - US Dollar

EUR - the Euro

In fact, if you are a small investor, you're likely just going to concentrate on these currencies; save the other currencies for more experienced and/or larger investors.