The Foreign Exchange (Forex) market is the biggest market on earth today. It has a daily turnover of more than 2.5 trillion US$, which is more than 100 times greater than the NASDAQ. The Forex market is traded 24 hours a day, Monday to Friday. The market consists of trading between large banks, central banks, currency speculators, multinational corporations, governments and other financial markets and institutions.

Understanding Forex Trading
When you are trading Forex you are trading one currency against another. An example would be when you are trading your Dollars for Euros. Most people have experienced this when visiting another country with a different currency. Because the rate for which you can trade your money fluctuates over time, it is also possible to earn money with currency trading. The only rule you have to follow says ‘buy low, sell high’. Of course this is not as easy as it sounds as you never know in advance what would be considered ‘low’ and ‘high’. However, if you know which factors influence the rate of a currency, you can make predictions about the future rate of this currency. An important aspect to know when trading is called the ‘spread’ of the currency. This is the difference between the rate to buy and the rate to sell the currency. This is expressed in ‘pips’, which is the smallest unit of price of a currency: 0.0001 of a currency unit. For example:

In this case the spread is 5 pips (1.3512 – 1.3507 = 0.0005). This means that if you want to buy US Dollars with Euros, you will receive $1.3507. In case you immediately trade this back for Euros you will only receive €0.9996. In this case you lost €0.0004 by only changing from one currency to another and back. This is why a low spread is important when trading, to make sure your money will not all get lost just by trading.

Predicting the Forex market
The Forex market is very complicated and affected by many factors. Nevertheless, the price is always a result of all supply and demand forces. The demand and supply is influenced by several elements which can be put into three categories:

1. Economic Factors
This means the economic conditions and economic policy of a currency zone. The economic policy includes fiscal policy and monetary policy. The economic conditions consist of government budget deficits or surpluses, balance of trade levels and trends, inflation levels and trends and economic growth and health.

2. Political Conditions
This influence can be seen very strong during election time. Also in political unstable countries this is a major influence on the currency price.

3. Market Psychology
This is a major influence in day trading. Currency speculators immediately react to the announcement of a specific economic number. This often results in a market being ‘oversold’ or ‘overbought’.