What is Forex trading and how does it work?

What is FOREX

The Foreign Exchange market, also called FOREX or FX, is the global currency trading market. With a daily volume of more than $5.3 trillion, it is the biggest and most exciting financial market in the world. Whether you sell EUR 100 to buy US dollars at the airport or a bank exchanges 100 million US dollars for Japanese yen with another bank, both of these are FOREX deals. The players on the FOREX market range from huge financial organizations, managing billions, to individuals trading a few hundred dollars.



Enter online FOREX trading
Thanks to the internet you can trade on the FOREX market in the same way as traders from the largest banks and investment funds.
All you need to get started is a computer with internet access and a trading account with a FOREX broker.



How does FOREX trading work
On the FOREX market one currency is exchanged for another. The single most important thing on the FOREX market is the exchange rate between two currencies (a currency pair).
You’ve probably seen it on the news:
CURRENCY PAIR EXCHANGE RATE
EUR/USD 1.4515
GBP/USD 1.6430
An exchange rate can change very rapidly, sometimes several times a second, so there’s a lot of action going on 24 hours a day, 5 days a week. In general, the currency exchange rates reflect the health of countries’ economies. If the economies of the Eurozone are doing better than the US economy, the euro will go up compared to the dollar (EUR/USD ↑) and vice-versa.
How do you make money on the FOREX market
Here’s an example of a FOREX trade. You decide to buy 1 000 euros against US dollars. The EUR/USD exchange rate at which you can BUY at this moment is 1.4500 so you pay $1 450.
Later, the EUR/USD exchange rate at which you can SELL euros for US dollars is 1.5500. You sell your €1 000 and get $1 550. Having started with $1 450, you now have $1 550 – you’ve made a profit of $100. Alternatively, the EUR/USD exchange rate at which you can SELL euros for US dollars is 1.3500. You sell your €1 000 and get $1 350. Having started with $1 450, you now have $1 350 – you’ve made a loss of $100.

That’s how money is made or lost on the FOREX market.

Spread
If you look at the FOREX quotes on your trading platform you will see that there are 2 prices for each currency pair. One is the price at which you can buy, referred to as the “ask price”, and the other is the price at which you can sell, referred to as the “bid price”. The difference between those two prices is known as the spread. The ask price is always higher than the bid price.

Leverage
If your FOREX broker offers you leverage of 1:100, you can trade with 100 times more money than your deposit. This means that if you want to buy 100 000 EUR/USD you only need to have EUR 1 000. With this leverage you can take a position with 100 times larger value, resulting in 100 times bigger profits or losses, therefore great care is required when placing your trade. Equities on the other hand are traded without leverage. Equities on the other hand are traded without leverage.

Make your first FOREX deal
To start please get a FREE Practice Account and log in. Then pick a currency pair (e.g. EUR/USD), choose a quantity and press the BUY button if you think the value will rise. Now you are a trader in a market used by millions of people all around the globe. You will earn money if the EUR/USD price goes up, and lose if it goes down. Check out your current profit or loss in the Open positions window. You can keep this position as long as you like. And when you no longer wish to keep your position, just close your trade by pressing the X button in the Open Positions window.

Long and Short trades
In the above example, we bet that the EUR will go up against the USD so we bought EUR/USD hoping to sell it later at a higher price. This is called long position. But what if we expect that the EUR will go down against the USD? Well, then you do the opposite – you sell the EUR/USD, expecting to buy it cheaper at a later time. The short trading enables you to take advantage if the exchange rate is going down.

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