What is Forex Trading? – A Beginner’s Guide

What is Forex Trading?

The global market for trading of currency is known as the Foreign Exchange Market or as one may know it simply as Forex or FX. It is the most exciting and biggest financial market in the whole world with a day-to-day volume of more than $5.3 trillion. When you sell 100 US dollar for Japanese Yen to a bank or the airport or exchange EUR 100 to buy US dollars, both of them are deals of FOREX. Huge financial organizations, who manage billion to even individuals who are just trading a mere 100 dollars all are part of the Forex trading market.

How can one participate in FOREX trading?

You can take part in the FOREX market in the similar manner as traders from larger banks and investment funds do that is with the help of the internet. All you will be needing is a computer and a trading account which you can get by meeting a FOREX broker.

How does FOREX trading works?

One currency is exchanged for another in the FOREX market. The most important thing in the FOREX market are the rate of exchange between the two currencies. The rate of exchange can go through several changes in just a matter of seconds, so there is a lot going on in just a span of 24 hours a day, 5 days of a week. The rate of exchange is reflecting a particular economy’s health in comparison to another economy. For example, when the Eurozone economies are doing better than the economy of US, the euro will going up in comparison to the dollar and vice versa may also happen.

How to make money on the FOREX market?

Let me give a practical example of how money is made or lost in FOREX market – let’s say at this moment you decided to buy 1,000 euros against US dollars and the current EUR/USD exchange BUY rate is 1.4500, thus it means that you will be paying $1,450 for buying those 1000 euros.

After some time, let’s say that the EUR/USD SELL rate is 1.5500, which means you can sell your 1,000 euros for $1,550, thus having a profit of $100. Same way let’s say that the SELL rate is 1.3500, which means you can sell that same 1,000 euros for $1,350, here instead of a profit you will make a loss of $100.

Spread

While looking at the FOREX quotes on your platform of trading you can see that for each pair of currency there are two prices given. One is the price in which you can buy known as the “ask price” and the other is the price in which you can sell known as the “bid price”. Spread is the difference between these two particular prices. The bid price is always lower in comparison to the ask price.

Leverage

Let’s say that your FOREX broker is offering you a leverage of 1:100 which means you can trade with 100 times more money than you have with you. In practical sense it means that you will only need 1,000 euros to buy 100,000 EUR/USD. You can take on a position whose value is 100 times larger and can also give you profits or loss which is 100 times bigger, therefore you should be very careful with this kind of a trade. In case equities, it can be traded without any kind of leverage.

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