Ever watch the news and see the ending FOREX trades of the currency markets? They're usually based on how individual currencies traded against the dollar. This is the abbreviation for the Foreign Exchange market. The currency market is a market where the values of individual currencies from all over the world are traded. The currency market today began in the 1970’s as currencies that were historically tied to the gold standard, or the price of gold, were decoupled and allowed to float.

So how does this work? Let's say that you believe the United States market is going to be suffering from inflation. That is, the value of the dollar, over the next year or so is going to go down....and all 100 dollars of your savings is in US dollars. One way to trade the FOREX would be to trade your savings in dollars for a currency you believe will be more valuable or stable like the EURO as an example. For this example, let's say one dollar is worth 2 Euros and remember this is an example only. So the trade is 100 US dollars for 200 European EUROS.

Next, let's say your right and inflation does hit the US hard and the value of the dollar drops by 10%. Be aware that when talking about currency we're talking not about the number of dollars and other currencies but the value of those currencies. That is, what it can buy or it's actual worth. So in our example, if you kept your savings in US dollars it would now be worth only 90% of the value it held last year. Because you have your savings in EUROS however and that market has remained stable, the VALUE of your savings has been protected. The reason is that the FOREX trading markets will adjust the value of the dollar because of the inflation and raise the value of the Euro appropriately. So in this example, a US dollar would be worth about 1.8 Euros.

To complete the example, your savings of 200 EUROS could be traded back into US dollars. Because of the inflation however and the value of the dollar went down so you can now trade your 200 EUROS for about 110 US dollars.

The latest computer versions of Forex mechanical systems are complete "black box" operations (you cannot have all the emotion involved when you follow a specific system).This could be a good explanation as to why these systems are called mechanical systems. But that doesn’t mean that they aren’t intelligent enough. Turn the computer on, start the system, and it updates your database, and generates trading recommendations, and places your orders directly to the brokers.

Unquestionably, in Forex trading systems, speed is of the essence in these hectic times. Every nanosecond counts when you are trading using five minute charts. The most basic trading systems rely solely on moving averages. The more "sophisticated" systems use combinations of moving averages of both price and volume. The most "expensive" systems incorporate stochastics, which are the mathematical techniques for a non-linear science.

Most of these Forex trading systems are reactive (which means they diagnose the situation and act accordingly, they do not initiate without signals from the market) by design. Like, if a stock or a commodity acts in a certain way, the system assumes that the stock or a commodity will continue to act that way. It generates this conclusion based on the formulas programmed into the system some “Black Boxes" also compute a large array of indicators in an attempt to increase confidence of an action recommendation. Most mechanical trading systems buy or sell breakouts. The stock market calls these traders momentum players. Their formulas assume a continuation of that movement. Should that movement fail to continue, the system will generate a loss, plus the commission cost.

Though you probably heard it a lot of times before - the importance of margins to forex trading is huge, almost critical.

One of the greatest advantages of the Foreign exchange market is the option to be traded on margin. A relatively small deposit can control much larger positions in the market. For trading the main currencies, most brokers (almost all of them) require a 1% margin deposit, which means that in order to trade one million USD; you need to place just USD 10,000 by way of security.

What it actually means is that you will have obtained a leverage of up to 100 to 1. This means that a change of, say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit. You can check out specific examples in any forex site, but it sure calls for extremely careful approach, which is critical to your investment. Both profit and loss opportunities are big and you should be very sure of every trade you make.

The margin is actually a loan you get, and when you play with some-one else’s money, you should be aware of each and every step you make, or you’ll find yourself without your money, and with some extra money you need to pay.

That’s why it is very wise to learn the field before you start playing with real money, and proceed in the forex market one step at a time. Just remember, that the market can be very cruel if you don’t treat it with the respect it requires - and it’s your money on the line.

Many people know that, but it is important to say: in forex, the tighter the spread, the better for you. Tight spreads are meaningful and helpful only when they are coupled with good execution. The quality of execution determines whether you actually receive the tight spreads as promised. If your screen shows a tight spread, but your trade is filled a few pips to your disadvantage or is mysteriously rejected. When this happens again and again, it means that the broker you’re working with is displaying tight spreads but is effectively delivering wider spreads. Rejected trades, delayed execution and slippage are some of the strategies some brokers use to avoid the promise of tight spreads.

Though sometimes neglected - it’s important to remember that spreads must always be considered in conjunction with depth of book. Strangely, when it comes to economies of scale, forex doesn't behave like most other markets. On the interbank market, the larger the ticket size, the larger the spread tends to be. In many cases, the tight spread offered applies only to a capped trade sizes that are grossly inadequate for typical trading strategies.

Spread policies differ from broker to broker, and the policies are often not exactly transparent. This makes comparing brokers very difficult. Some brokers offer fixed spreads that are guaranteed to remain the same regardless of market liquidity (we recommend: check the fine print for exceptions!) But since fixed spreads are traditionally higher than average variable spreads, you are effectively paying an insurance premium throughout most of the trading day for protection from rare outbursts of short-term volatility.

Other forex brokers offer traders variable spreads depending on market liquidity. Spreads are tighter when there is good market liquidity but widen as liquidity dries up.