When you travel outside of your country and go to another country with a different currency all it's own, the thing that is most frustrating is to figure out the exchange rate. If I have a US dollar, what will the value of an item be in Swiss Franks, or British Pounds?
Although this can be confusing, the exchange rate is usually pretty steady and if you went and checked the rates online or called a bank for them, you know there will be a very minimal difference between what you got then and what you will have to deal with when you arrive at the foreign country.
When it comes to Forex investing, the rate of exchange works differently.
You still will deal with just a pair of currencies, that's a good thing. Simple and to the point, right?
That's as far as it goes in basics.
First, the changes in the rates between one country and another country's currencies will vary, will vary often, and sometimes even vary on a second-by-second basis. These changes will be where you will make or lose money.
Second, your ability to understand the ups and downs of the currencies will also have to be critical to your ability to make money. The changes to these rates are controlled by many factors. With the recent upheaval in the Middle East you most likely noticed that the cost of Oil has gone way way up. The production of Oil hasn't stopped and what you do with Oil hasn't changed. But the price of it has gone up considerably. This is because speculators believe that there is a strong possibility Oil may not be available to other countries as easily as it is today. This is a rule that you must understand totally or you will not make it in this field.
This rule is known as the supply and demand curve. Simply stated it says that the more there is of one thing the lower its cost will be. The less there is or is expected to be, then the higher the price it will have.
This works in Forex as it does in any other venture. So, memorize it, learn it, understand it.
Third, although the Forex rate will be adjusted by many factors, it is important for a currency to remain stable so when the swings start, it is very common for the country's financial side of the government to step in and take measures to adjust this so they don't fluctuate as much.
This is important to know because you can take advantage of the swings in the currencies to get some profits.
Fourth, because the currency rates don't vary too wildly, the way for Forex investors to profit is to take advantage of the small changes that happen. These changes in value are called pips. These are something like 1/100th of one percent of the change. That is what Forex trading is all about.
For investors, this is the most critical element to understand. It's not what currency does what, although that's important but how many pips those changes translate into. And what direction are they going.
Fifth and last, the Forex rates aren't much different than your typical currency exchange rates. What you do with those rate changes at the 1/100th of one percent level is where the pedal hits the metal. You either find yourself coming to a screeching halt or speeding wildly.