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First Steps in Forex

Let us consider a very simple scenario. Suppose that today the pair EUR/USD is characterized by: Bid (buying price) 1.3 and Ask (selling price) 1.35 (This is how much USD you are supposed to give or take  for 1 EUR). Now, suppose you know that tomorrow these parameters will change to

Bid : 1.4 and Ask: 1.45.

Clearly, the price of EUR  has risen. Therefore, if today you bought 100EUR for 135USD, tomorrow you can sell them for 140 and have 5USD in your pocket. 

Once you get the main idea think about the following scenario

Today :       Bid  1.3 and Ask 1.35

Tomorrow : Bid  1.33 and Ask 1.37

In this case the price of EUR has also risen however, the spread (the difference between Bid and Ask) is still large and if today you bought your 100EUR for 135USD today you can sell it only for 133. 

Now think about the inverse. If today you sold 100EUR for 133USD what will happen tomorrow?

These is what basically happens in the Forex market. As you can see the idea is very simple and yet it is a multi billion dollar industry.    

Of course nobody knows what happens tomorrow. However, there are some numerical indicators of the behavior of the currency which can predict the dynamics of the currency. When this prediction is based purely on the dynamics of the currency in the past, it is called the technical analysis. When the prediction  includes political and socioeconomic status of the market, it is called fundamental analysis.

Many market analysts theorize that it is not necessary to use the fundamental analysis since the market sooner or later will reflect the political or economical changes ("market knows everything"). Other groups suggest that the successful trader should combine the both components to design a successful trading strategy. 

Losses are inevitable in Forex trading. The Forex traders must learn to cope with this losses and treat them as a part of their daily routine. However, you should also analyze your losses  and determine what you did wrong. Define what you could have done better and use that information to learn and recover. Therefore, the forex trading psychology is one of the most important parts of the learning curve of the forex beginner.

Finally, here is what you have to remember for today : education, technical analysis,fundamental analysis, trading psychology.  

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