The Forex (foreign currency exchange) market is the largest securities market in the world. As of 2007 it reached an average daily volume of $3.2 trillion. Most of the volume isn't generated by financial institutions, governments and corporations transferring cash as part of their operations. The bulk comes from traders swapping currency in hopes of profiting from changes in exchange rates. Forex trading may be done by anyone with access to the Internet and a little money, but it carries considerable risk to go with its high profit potential.
Learn How Forex Works
Currencies always trade in pairs as traders buy one currency of a pair with the other at the current exchange rate. For example, if you see the euro and U.S. dollar quoted as EUR/USD = 1.2500, this means at the time of the quote it cost $1.2500 to buy one euro (conversely, 0.8000 euro would buy one U.S. dollar). Exchange rates are listed to four decimal places because the smallest possible price change in Forex is very small. For the U.S. dollar it's just $0.0001 (1/100 cent) and is called a pip.
The reason why Forex trading has so much risk and potential profit is that there are very low margin requirements. Traders typically use margin ratios of 30:1, 100:1 and even 400:1. For instance, at 100:1 you can buy a standard lot of $100,000 worth of currency with just $1000 in cash. AS a result, even small price changes can make big profits or wipe out all the money you risked. Pricing in Forex is based on a bid/ask system. The gap (or spread) between a bid and ask is usually just 1 or 2 pips for wholesale trades. Retail brokers raise the spread to 3 to 20 pips and keep the difference as a fee, but don't charge commissions.
Getting Started
The mechanics of trading Forex are simple. You need an online account with a Forex broker. The Forex market is mostly unregulated, so the SEC suggests you pick a broker who is a member of the National Futures Association self-regulating body. Good brokers provide trading software (if you don't have your own) along with real-time quotes and market information. Most brokers require a $2,000 initial deposit for a regular trading account (as of 2009). Opening an account takes only a few minutes and you can make all money transfers electronically using a service such as PayPal.
It's a good idea to start with a virtual (practice) account that allows you to "trade" using real-time market data and prices. Many Forex brokers offer these accounts free. Once you've gotten the feel of how real-time Forex trading works, you may want to start with a "mini-account." Some brokers will let you open one and trade micro-lots of currency with initial deposits of as little as $25. When you're ready you can move up to a regular account and trade full-size lots of currency.
Study the Market
Successful Forex trading doesn't just happen. Good traders spend a lot of time learning and monitoring international news and economic conditions (the "fundamentals") and the technical analysis that tracks short-term trends in currency markets. When traders talk about fundamentals they mean things like the effects of central bank monetary policy, news of political instability in a country or inflation, trade deficits and interest rates. Each factor can affect the demand for a particular currency. If the demand goes up, so will the value of that currency against other currencies. If demand drops the value of the currency falls, too.
Technical indicators are vitally important to the Forex trader. For example, one important indicator is the Reflexive Strength ratio, which measures how many upward price moves a currency makes compared to downward moves and indicates how strong demand is for that currency. This and other measures are collectively called Forex signals. You can subscribe to online services that provide real-time Forex signal updates.
Keep in mind that, even with all the practice and information, even the best Forex trader loses money sometimes and it's inevitable that you will as well. Making money on Forex takes time, work, and a willingness to take calculated risks.
Source - eHow
