Forex trading can be both profitable and exciting.  However, as with any endeavor, it is important to become educated and craft a well thought-out-plan before diving in head first.  A good primer in Forex trading is the best first step for those seeking to conquer the world’s currency markets.

Foreign exchange (Forex or FX for short) involves the buying and selling of the major currencies found around the world.  The salient currencies most often traded by Forex participants include the U.S. Dollar, the Euro, the Japanese Yen, and the British Pound.  Each currency is valued against another currency; this is no different than what you see at a typical currency exchange shop while on vacation.

This one-on-one currency valuation is termed a “swap.” A Forex trading swap is simply understood by thinking in terms of how much of one unit of a currency can be swapped for another currency.  For instance, how many Japanese Yen can be bought for one U.S. Dollar?  To use round numbers for this example, assume the current quote on that swap entails one U.S. Dollar being worth 100 Japanese Yen.

If you trade Forex utilizing a Dollar/Yen swap, you can invest with one of two theses.  You can trade hoping the Dollar decreases in value against the Yen.  In this scenario you are “long” the Yen against the Dollar. Conversely, you can trade with the goal of the Dollar increasing in value against the Yen.  In this instance you would be “short” the Yen against the Dollar.

Analyzing the first scenario, assume you invested $100 going long the Yen against the Dollar.  Assume further that the Dollar/Yen exchange rate dropped from 100 Yen to the Dollar to only 90 Yen for one Dollar.  You essentially purchased 10,000 Yen on your initial trade ($100 invested purchasing 100 Yen for each Dollar).  Now that the quote has moved to 90, you are able to exit the trade redeeming your 10,000 Yen for $111.11 USD.  Consequently, you made $11.11 profit on this Forex trading transaction.

When you are “long” one currency against another, your hope is that the currency you own improves in value against the one on the other side of your swap.  Alternatively, when you are “short” one currency against another, your goal is for the currency you are short to decrease in value.  Hence, with Forex trading you can effectuate trades to capitalize on either projected strength or weakness of any major currency as quoted against any other major currency.

Valuations within the Forex trading universe change by the second.  This volatility allows for quick profits for Forex traders who are able to adeptly move in and out of various positions.  Today’s best traders are armed with sophisticated trading and execution programs, which give them a leg-up against the strong competition within the Forex trading environment.

Additionally, most of these programmed Forex trading vehicles allow for practice accounts, which allow new participants to formulate and refine their strategies without risking real money.  Those who have tired losing money to CEO scandals and irrational stock market events should explore removing those uncertainties by transitioning away from stocks in favor of trading Forex.