Before we get into how forex trading works, we should go over the difference between spot forex and currency futures.  Both are ways to bet (trade) on the strength of one currency to another (ie: the strength of the US dollar vs. the Euro).  However, in the spot market you are actually exchanging currenies while in the futures market you are only buying and selling contracts (promises) to buy or sell a currency at a future date.  When you go to a bank or a kiosk at the airport to echange one currency for another you are participating in the spot forex market.

When people mention the forex market they are usually referring to the spot market.  In order to trade on the spot market, you must first find a broker that can accept new accounts from someone in your country.  There are some European brokers for example that will not accept clients from the US.  Once you have your new account setup, you can open a position buy buying or selling a currency pair.  Common currency pairs are EUR/USD, GBP/USD, and USD/JPY.

Profit and Loss – If you bought a currency pair and that first listed currency (the base currency) increases in value, then your position will be in profit.  If the price goes the other way, you will suffer a lose.  The forex system moves in a unit called “pips”.  A pip is a single basis point move and is how we measure increases and decreases in our trading instrument.

Suggested Reading – More Forex Basics (guest post)