Forex Trading = Foreign Exchange

Forex trading is also called "currency trading" or "FX," short for "foreign exchange." While foreign exchange does not get as much attention as the stock market, options and commodities do, for example, it is nonetheless the biggest market in the world. The foreign exchange market also offers investors a huge opportunity for profit.

When you trade on the foreign exchange, you do not trade stocks or bonds. You trade in currency. Basically, forex trading involves buying one currency and selling another. As exchange rates fluctuate, you make money or lose money.

With forex trading, you don't invest in a single company or group of companies as you do with stocks or mutual funds, for example. Instead, you are investing in a particular national economy. You are pinning hopes on one nation's economic health versus that of another.

As an example, let us say that you are comparing the Japanese yen and the US dollar. Your research seems to tell you that the US dollar is undervalued and will soon rise in price; simultaneously, you expect the Japanese yen will lose some value. In that case, you would execute a trade to buy US dollars and sell Japanese yen. If you are correct, the exchange rate will go up and you will profit from your analysis.

Even though this sounds easy, though, it is not. In fact, currency prices can be very difficult to predict, because so many things can cause a change in exchange rates. You also have to remember that with currency trading, you trade in pairs. Therefore, you buy one currency while you sell another. Therefore, you won't just look at one nation's economy, but you will be comparing two.

Of course, you do not have to limit yourself to just the US dollar and the Japanese yen, for example. There are many dozens of different currencies to choose from, with seven major ones. Therefore, if you are just starting out, I would recommend that you stick to the seven major currencies. They are as follows:

USD - US Dollar

EUR - the Euro

GBP - British Pound

JPY - Japanese Yen

CHF - Swiss Franc

AUD - Australian Dollar

CAD - Canadian Dollar

If you are a small investor, you will generally concentrate on trading these particular currencies.