Whenever I mention Forex trading to someone, the first question I’m usually asked is, “What the heck is Forex trading?” Well, I’m prepared to answer that question right from the beginning: Forex trading--also known as the foreign exchange market or FX--involves the buying of one nation’s currency and the selling of another nation’s currency. These units of currency are always expressed in pairs, such as EUR/USD for the Euro and the US Dollar. The currency being purchased will be listed first, while the currency being sold is listed second.

Forex trading usually revolves around the world’s major currencies, with more than 80 percent of the market devoted to the Australian Dollar (AUD), British Pound (GBP), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF) and the US Dollar (USD). Trading takes place 24 hours a day, as one session begins when another one ends. Major trading centers are located in London (the largest), Tokyo, New York, Singapore and Hong Kong, although others do exist. Trading is closed on the weekends.

While the average person can participate in Forex trading, the majority of the moves are made by major players such as governments, corporations, and investment banking institutions. Leading currency traders include: Deutsche Bank, Barclays Capital, UBS AG, Royal Bank of Scotland, Citi, Morgan Stanley, Goldman Sachs, HSBC, and Lehman Brothers. There’s a lot of money to be made, and the daily turnover is over $3 trillion (with a 41% increase between 2007 and 2008, alone).

Many savvy investors find Forex trading preferable to that of the traditional stock market. The usual reasons given are twofold:

1. Simplicity - Okay, Forex trading isn’t exactly simple, but there are a lot fewer commodities to keep track of. If you combine the New York Stock Exchange and the NASDAQ, there are over 8,000 stocks to monitor and analyze. With the foreign exchange market, there are only four major currencies and thirty-four second tier currencies. 38 is a lot more manageable of a number than 8,000.
2. Stability - As you probably know, the traditional stock markets are prone to wild swings due to fluctuating interest rates and the general Bear/Bull mentality; this isn’t the case with Forex trading. If one currency isn’t performing up to expectations, the trader can always look to make a profit with another one.

Forex Trading Terms

Forex trading terms can often seem complicated to the uninitiated. In this section, we’ll be taking a look at some of the most basic Forex trading terms.

• Bid Price - The price at which a buyer is willing to purchase a currency. Always expressed as a 5 digit number.
• Ask Price - The price at which a seller is willing to sell a currency. Always expressed as a 5 digit number.
• Spread - The difference between the bid price and ask price.
• Margin - Collateral for a position. This comes into play when the market moves in a downward direction and the forex trader requires additional funds. This is done by requesting a “margin call.”
• Long Position - The trader buys a currency at a certain price, expecting to sell it later at a higher price.
• Short Position - The trader sells a currency with the expectation of buying it back later at a lower price.
• Spot - A two-day delivery transaction which indicates a direct exchange of currencies.
• Forward - In this style of exchange, money does not change hands until an agreed-upon date in the future.
• Future - Currency which matures at a future date and usually carries a three-month contract.
• Swap - The swap is the most common type of forward transaction. In these cases, two parties agree to swap currencies and then swap them again at a future date.