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What is Forex?
We Are traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet or purse or man purse into the currency of the country you are visiting.
You go up to the counter and notice a screen displaying different exchange rates for different currencies. You find "Japanese yen" and think to yourself, "WOW! My one dollar is worth 100 yen?! And I have ten dollars! I'm going to be rich!!!" (This excitement is quickly killed when you stop by a shop in the airport afterwards to buy a can of soda and, all of a sudden, half your money is gone.)
When you do this, you've essentially participated in the forex market! You've exchanged one currency for another. Or in forex trading terms, assuming you're an American visiting Japan, you've sold dollars and bought yen.
Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed. It's these changes in the exchanges rates that allow you to make money in the foreign exchange market.
The foreign exchange market, which is usually known as "forex" or "FX," is the largest financial market in the world. Compared to the measly $74 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely ginormous with its $4 TRILLION a day trade volume. Forex rocks our socks!
What is Traded?
The Very Simple Answer Money Because you're not buying anything physical, this kind of trading can be confusing.
Think of buying a currency as buying a share in a particular country, kinda like buying stocks of a company. The price of the currency is a direct reflection of what the market thinks about the current and future health of the economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to other countries' economies.
Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro zone members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi
Importance of News
It's not enough to only know technical analysis when you trade. It's just as important to know what makes the market move.
Just like in the great Star Wars world, behind the trend lines, double tops, and head and shoulder patterns, there is a fundamental force behind these movements. This force is called the news!
To understand the importance of the news, imagine this scenario (purely fictional of course!)
Let's say, on your nightly news, there is a report that the biggest software company that you have stock with just filed bankruptcy.
What's the first thing you would do? How would your perception of this company change? How do you think other people's perceptions of this company would change?
The obvious reaction would be that you would immediately sell off your shares. In fact, this is probably what just about everyone else who had any stake in that company would do.
The fact is that news affects the way we perceive and act on our trading decisions. It's no different when it comes to trading currencies.
There is, however, a distinct difference with how news is handled in the stock market and the forex market.
Let's go back to our example above and imagine that you heard that same report of the big software company filing bankruptcy, but let's say you heard the report a day before it was actually announced in the news.
The news is important to the Forex market because it's the news that makes it move. Regardless of the technicals, news is the fuel that keeps the market going!