Wait is Localbitcoins really banned in Germany? Is the German government going to ban the use of Bitcoin in the country or are they waiting to legalize it or something?
The site itself is not banned, you can still open it from Germany. However, localbitcoins itself decided not to serve customers in Germany anymore.
I guess people in Germany still trade Bitcoins for cash among themselves right?
Yes, some do. There is also bitcoin.de and coinimal.com, both serving customers from Germany.