The term 'FX' or 'FOREX' is an abbreviation for 'Foreign Exchange' or the Currency Market. It is the international market where currencies are being traded, by using the differences in exchange rates between currencies. Traders are speculating on a particular currency to rise or fall against another currency.

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For example: say you are like me from the Netherlands and the currency in your country is the Euro. It is August 2008 and you decided to by a car of Ebay. Let's say you bought a nice used Porsche 911 turbo for $50,000. Since you are from the Netherlands and your bank account would in Euro's, you would not be able to pay for this car in Euros. When paying for your new set of wheels, you would order your bank to wire $50,000 USD to the seller. Your bank would calculate at the time of the transfer what the EURO/USD conversion rate would be. In this case, the EURO/USD (or EUR/USD as this currency pair is called) was 1/1.60000. This means that for every Euro you would get 1.60000 USD. So this Porsche would cost you in $50,000 / 1.60000 = 31,250 Euros.

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Let's say you kept the car until March 2015 and decided to sell it back to the US via Ebay.com. The exchange rate at this time was 1 EUR = 1.05000 USD. So every Euro is worth 1.05000 Dollars. The value of your car on Ebay has not fallen during this time, similar cars on Ebay still go for $50,000. So you decide to sell it for the price you bought it 8 years ago. And within a week you indeed sell it for the $50,000 you asked.

What would you get paid? Since a single Euro is now worth 1.05 Dollars. You get paid by your bank: $50,000 / 1.05000 = 47,619 Euros. This means you have gained 16,369 (47,619 - 31,250) Euros just by profiting from the exchange rate difference in these 8 years.

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This example shows how exchange rates differences between currencies can make you money. For this to happen you always have to pair two currencies together. You cannot make money from just buying and holding a 1,000 Dollars for a year and then use it in the USA to buy goods or services. It only works in between economies. 

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The terminology used to describe the two currencies together is called a 'currency-pair'. You pair two currencies together to indicate the value difference between them. For instance: EUR/USD, pairing the Euro against the US Dollar. The first currency in the pair (EUR in this case) is called the BASE-currency. The second currency in the pair (USD in this case) is called the QUOTE-currency. 

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The forex market is considered an Over-the-Counter (OTC), or “Interbank” market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
 

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WHY TRADE FOREX

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The currency exchange market is the most liquid market in the world. In fact the currency market as a whole more than 200 times larger than the the New York Stock Exchange market, in terms of money being traded on a daily basis. On a typical day the NYSE will trade about 22,4 Billion USD worth of stocks, while in the FX market 5 Trillion Dollars will change hands EVERY DAY!

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This means that for for any exchange rate value there are buyers thinking the exchange rate will go up, and sellers thinking the exchange rate will fall. If you've ever traded stocks (certainly stocks where the liquidity is low - i.e. the float / number of outstanding shares is low), you know that it can be extremely hard to unload an open position at any given price back to the market. There are simply not enough buyers prepared to take the position off of your hands at your desired price if your position is quite large.

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This is never the case in the FX market. It is so huge that even if you would like to sell a 10 Million Dollar EUR/USD position at exactly 1.10048 EURO you could! It is that massive! 

The FX market is open 5 days per week, 24 hours per day. From Sunday 22.00hr GMT till Friday 22.00hr GMT. Since it is a 24hr market during office days, no news can come out to manipulate price when the market is closed. This would result in 'gapping', a phenomenon we frequently encounter in trading stocks. Gapping makes reading price-action harder and most importantly won't enable you to close a position when the market is closed, and goes beyond your stop-loss price, which could result in heavy losses.

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For this reason the FX market is very predictable. The price of every closing candle lines up perfectly with the next candle's opening price. What this all means we will teach you in the "Technical Analysis" chapter.

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One other advantage of trading FX, is that costs associated with opening and closing positions are the lowest in the industry. Compared to let's say US common stocks (around $15-$25 per round trade (open & close), a typical FX trade on the EUR/USD with a comparable account size (around 10K) would only cost you around $4-$10 per round trade (open & close).   

HOW MANY CURRENCY PAIRS DO WE TRADE

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There are hundreds of currency pairs that can be traded. However due to volatility, volume and spread (we'll explain in a bit what this means), we only trade the 8 MAJOR currency pairs.