Forex Basics - Part 1 of .... I'll let you know when we get there...

Hi,

OK, today I've learned a little bit about Forex. Here are some really basic basics - so basic you should know them already, but in case you don't...

FOREX is short for FOReign EXchange - if you trade FOREX you are trading in foreign currencies. It's also known as FX, or "Spot". Sometimes "FX Spot" - it's all the same thing.

You trade in "pairs", such as USD/EUR (US Dollar to Euro), or GBP/JPY (Great British Pounds aka Sterling) and Japanese Yen.

All the currencies are indicated by a three-letter code, where the first two are the country (eg US, JP, GB), and the third one is the initial of the currency (eg Dollar, Yen, Pound). The main exception to this is the Euro, which is EUR - if it followed the same convention, I think it should be EUE - but it's not. Europe isn't a country - perhaps that's why it gets special treatment.

Apart from those already mentioned, there are four more popularly traded currencies - CHF (Swiss Franc), CAD (Canadian Dollar), AUD (Australian Dollar) and NZD (New Zealand dollar). However, the USD, EUR, GBP and JPY currencies account for about 80% of all Forex transactions.

You make money by "buying" one currency, in the hope it will go up against the second currency in the pair, and IF it does, you sell it and get more of the first currency back.

It's a bit like changing your holiday money into a foreight currency, and then when you get home, changing it back. If the rate has changed in your favour, you get more back than you started with. Assuming you didn't spend any money in your vacation, of course. But you get the idea.

More of this in another post, but in short, you might buy EUR/USD - so you "buy" Euros at say 1 to 1.20, they then increase in value against the Dollar to 1 to 1.22, so you close your position (ie sell the Euros), and get back more Dollars than you started with.

Of course, if the rate had changed to 1 to 1.18, you would have lost money - that's the catch!

Thanks for reading - a bit more explanation on pairs and how you trade them coming up in "Forex Basics - Part 2 of.... ?".

Take care,
Zander.