What's that you say? You have never heard of the foreign exchange market before? That is no surprise, and since all of the big market players in this market are big banks and hedge funds, many individual investors tend to stick with stocks and bonds.

The foreign exchange or currency market has to do with the exchanging of one country's currency for another, and this market does around 1.5-2.5 trillion US dollars worth of volume every single day. Yes, trillion. To get a scope on how big that really is, it is about 30 times bigger than the average trading volume for the New York Stock Exchange.

Though some currency exchanges are based on practical reasons such as vacationing in a foreign country or a multi-national corporation that needs local currency in order to do business, the vast majority of forex trading volume is speculative in nature and is done via an internet connection.

The currency market is unique because it has no central exchange and it operates 24-hours a day, literally following the sunlight around the world as financial centers in different countries come to life. This market exists as a teaming network of interconnected bank computer servers, and it is through this network (using an internet connection) that small individual investors can trade with small volume.

As little as seven years ago, the barriers to entry for trading the foreign exchange were so high that mostly only high -net worth individuals could trade this market (with a minimum trade volume set at $1 million, and another $10-15 million in reserve capital).

Because this financial market is so tremendous, no single party (not even a central bank) can significantly corner the market. This means that exchange rates tend to be much less volatile than equities, especially small cap stocks. Because trading volume for such equities is so small (relative to the forex market anyway), significant fundamental announcements can cause price shifts as high as 25% or more in one day.

Market Analysis

When it comes to analysing the markets in order to determine proper entry and exit prices, the two main forms are technical analysis and fundamental analysis. Technical analysis is mathematically-based and has to do with using charts, indicators, and trying to locate patterns in price movement. Fundamental analysis is based more on real-world geopolitical events, such as economic indictors for different market segments of a country (housing for example), as well as scheduled announcements such as central bank interest rates.

The Major Currency Pairs

Though there are hundreds of different currencies in the world, over 90% of all forex trading volume is through seven different major currencies: The US dollar, the Euro, the British Pound, the Japanese Yen, the Canadian dollar, the Australian dollar, and the New Zealand dollar.

Since the United States dollar is presently the world's most dominant and widely-recognized currency, all of the other major currencies are quoted as an exchange rate relative to the dollar.

Each exchange rate is quoted as a pair, and that specific currency pair is always traded in the common order that it is quoted in. One of the most common currency pairs is EUR/USD, and in this pair the Euro is what we call the base currency, or the first currency that is listed, and this should be thought of as the currency that you are buying or selling when you place an order for that currency pair.

For example, if you were to see an exchange rate quote that said 'EUR/USD, 1.2500,' this would be saying that 1 Euro is worth 1.25 US dollars. If you thought the value of the Euro was going to appreciate, you would want to buy the EUR/USD pair. Conversely, if you thought that the US dollar was going to appreciate or that the Euro was going to depreciate in value, you would want to sell the EUR/USD pair.

The currency pairs that consist of the major world currencies are as follows: EUR/USD, GBP/USD, USD/CAD, USD/JPY, AUD/USD, USD/CHF and NZD/USD. Remember that this is the common exchange rate system used by all bankers, financiers, and investors around the world, and the exchange rates of a given currency pair should ALWAYS be listed in this order. (And also, if you do not know, CHF is the abbreviation for the Swiss Franc, so named after Switzerland's full name, 'Confederation Helvetique.')

Two other terms that are essential to understand when it comes to forex or currency trading are PIPs (Price Interest Points) and leverage. A pip is similar to a tick or a point in the stock market, and it is simply the smallest increment in which a currency exchange rate can fluctuate. For instance, if the EUR/USD exchange rate fluctuated from 1.2500 to 1.2560, we would say that it went up 60 pips. Pips are a forex trader's best friend, and successful currency traders seek to accumulate as many pips in their trading account as possible.

If you are coming to the table with a knowledge of stock trading, you should already be familiar with the concept of leverage, only you may be familiar with it as trading on margin. Leverage basically means that you are able to control more money than the trading capital you put into your account, and when it comes to forex trading this is a way to get huge gains or huge losses in a very short amount of time. Most brokers offer somewhere in the range of 50-250 times leverage, meaning that you would only need $1,000 in trading capital to control $50,000 to $250,000.

"Can I Really Make Money In This Market?"

I don't want you to have unrealistic expectations, but the answer is yes you can make money with forex. It is, however, much like making money in any financial market and indeed any business: there are a lot of losers, more losers than winners, and the thing that separates the two is knowledge.

Knowledge in forex is mainly your trading strategy and how good you are at analyzing the market to search for trading opportunities.