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Forex Currency Basics

We've mentioned this before, but like many things it bears repeating.  At base it all comes down to buy low and sell high. That's it. Buy low, sell high, lather rinse repeat. At the heart, the idea behind forex trading is that the forex currency you buy today is going to be worth more when you sell it tomorrow. Everything is based around the idea that there is no absolute value and exchange rates are going to continue to fluctuate.

Let's look at a couple of examples...

[hidepost]1) Dolly buys Pounds:.

Using her demo account, Dolly buys 10,000 Pounds at an exchange rate of 1.85, which costs $18,500. A week later, the Pound has risen to 1.97 and she sells the same 10,000 GBP for $19,700, making a profit of $1,200.

2) Jimmy buys Euros:

Using a real account, Jimmy buys 10,000 Euros at an exchange rate of 1.41, which costs him $14,100. Three days later, Jimmy decides the real money is in yen and decides to liquidate his Euro holdings. Unfortunately the Euro is now selling for $1.38 so he only receives 13,800 and marks up a loss of $300 on his first trade.

In both cases, all they did was convert one currency to another, then back again. This is the simplest kind of forex trading, and the kind we recommend you start with. Jimmy could have gone straight from Euros to yen without the intermediate step, but for the purposes of the illustration we decided to have him go back to USD first. .

Here are a couple of tables for those who find things easier to follow that way:

Table 1, Dolly GBP/USD.

Table 2, Jimmy EUR/USD.

In both these forex trades you'll see the currencies written as pairs because as previously discussed, all forex trades consist of buying one currency and simultaneously selling another. So when Dolly is buying GBP/USD she's selling USD from her account to buy GBP, and then when she closes the trade she'll be selling GBP to buy USD back for her account.

Continue to Base Currency Now...

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