Foreign exchange trading is essentially about trading money. There are several reasons why people and institutions would want to trade money. The two primary reasons are currency conversion and speculation. Currency conversion is simply the changing of money from one currency to another for the primary purpose of purchasing goods, services, or assets from a foreign country. For an American company to buy British goods, for example, would necessitate the conversion of U.S. dollars to British pounds.
This book will focus exclusively on foreign exchange trading for speculative purposes, or trading money with the explicit goal of making money. This speculation process is very similar to trading in stocks or futures. The goal, whether on a long-term or short-term basis, is to earn profits from price changes. Just as a stock like Microsoft will move up and down in price, currencies will also move up and down in price. The real trick is to be on the right side of the move, and to reap profits in return for assuming the risk of taking the trade.
Of course, there are many important ways in which trading foreign exchange is completely different from trading stocks or futures, but the primary objective is the same. If a trader buys shares in Microsoft, for instance, the hope is that the value of the shares will go up and the trader will earn profits. In the same vein, if a trader buys the Japanese yen, the hope is that the value of the yen increases so that the trader will earn a profit on owning that currency.
Learning how to make money by trading money is not an easy task. There are many factors that combine to make any given foreign exchange trader a successful one. This combination usually includes plenty of often painful trading experience, good risk management skills, solid technical and fundamental analytical abilities, and a sound psychological make-up. All of these will be discussed in detail further along in the book.
To begin with, though, an introduction to the world of foreign exchange trading is in order. This will cover all of the basics, and will begin with a very brief history lesson.
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