What is Forex Trading Verstion 2?

What Does Foreign Exchange mean?
"Foreign Exchange" refers to money denominated in the currency of another nation or group of nations. Any person who exchanges money denominated in one nation's currency for money denominated in another nation's currency is conducting foreign exchange. That holds true whether the amount of the transaction is equal to a few dollars or to billions of dollars; whether the person involved is a tourist cashing a traveler's check in a restaurant abroad or an investor exchanging hundreds of millions of dollars to acquire a foreign company. In other words, a foreign exchange transaction is a shift of funds from one country and currency to another.

What is Forex Trading?
The Forex (short for Foreign Exchange) market is the 24 hour cash market where currencies are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders' investments increase or decrease in value based on currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

What is an investor's goal in Forex trading?
The investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is done in currency pairs. For example, the exchange rate of EUR/USD on August 26, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1,000 euros on that date, he would have paid 1,085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro increased in relation to the U.S. dollar. Therefore, the investor could now sell the 1,000 euros in order to receive 1,208.30 dollars and make a profit of $122.06. Someone buying and then later selling U.S. dollars would have seen a $122.06 loss

Exchange Rate
Because currencies are traded in pairs and exchanged one against the other when traded, the rate at which they are exchanged is called the exchange rate. The majority of the currencies are traded against the U.S. dollar (USD). The four next-most traded currencies are the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), Australian Dollar (AUD) and the Swiss franc (CHF). These currencies make up the majority of market trading and are called the major currencies or "the majors."

Source: Federal Reserve Bank of New York

What are the differences and similarities between the stock market and foreign exchange market?
The Forex market is the largest financial market on earth. Average daily trading volume is more than 1.9 trillion. The New York Stock Exchange (NYSE) has an average daily volume of 55 million. Transaction prices in Forex are very low due to the amount of volume and large number of participants.

Trading is not limited to 9:30 AM - 4:00 PM like the NYSE. Forex offers round-the-clock trading and high market liquidity, better execution, and no restriction on falling markets. Like the stock market you can use both fundamental and technical analysis to determine what type of trade you might execute.

The Forex market is global while the stock market is something that takes place only within one country.

What is a pip?
A pip is the minimum fluctuation or smallest increment of price movement in the Forex markets.

Source: Forex Capital Markets

How does leverage work in the Forex market?
The leverage that is used in the foreign exchange markets is one of the highest that investors can obtain. Leverage is a loan that is provided to an investor by the broker that is handling his or her Forex account. When an investor decides to invest in the forex market, he or she must first open up a margin account with a broker. Usually the amount of leverage provided is 50:1, 100:1 or 200:1, depending on the broker and the size of the position the investor is trading.

To trade $100,000 of currency, with a margin of 1%, an investor will only have to deposit $1,000 into his or her margin account. The leverage on a trade like this is 100:1. Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading. Although you can see significant profits using leverage in currency trading is also worth noting that you can also see the same type of significant losses using leverage and trading currencies. That is where a trading style using stop and limit orders come into play to minimize risk.

Source: Investopedia.com