What Is Forex Trading
So what is is Forex trading you may ask? Forex is the exchange you can buy and sell currencies. For example, you might buy British pounds (by exchanging them to the dollars you had), then, after pounds / dollar ratio goes up, you sell pounds and buy dollars again. At the end of this operation you are going to have more dollars, then you had at the beginning.
Key Points
The Forex market has much higher liquidity, then the stock market, as much more money is being exchanged. Forex is spread between banks all over the planet and as a result it means 24 hour trading.
Unlike stocks, Forex trades are performed with high leverage, usually it is 100. It means that by investing $1000 you can control $100,000, and increase potential profits accordingly. Some brokers provide also so called mini-Forex, where the size of minimum deposit equals $100. It makes possible for individuals to enter this market easily.
The name convention. In Forex, the name of a “symbol” is composed of two parts – one for first currency, and another for the second currency.
For example, the symbol usdjpy stands for US dollars (usd) to Japanese yen (jpy).
As with stocks, you can apply tools of the technical analysis to Forex charts. Trader’s indexes can be optimized for Forex “symbols”, allowing you to find winning strategy.
Example Forex transaction
Assume you have a trading account of $25,000 and you are trading with a 1% margin requirement. The current quote for EUR/USD is 1.3225/28 and you place a market order to buy 1 lot of 100,000 Euros at 1.3228, expecting the euro to rise against the dollar.
At the same time you place a stop-loss order at 1.3178 representing a maximum loss of 2% of your account equity if the trade goes against you, 50 pips below your order price, and a limit order at 1.3378, 150 pips above your order price. For this trade, you are risking 50 pips to gain 150 pips, giving you a risk/reward ratio of 1 part risk to 3 parts reward. This means that you only need to be right one third of the time to remain profitable.
The notional value of this trade is $132,280 (100,000 * 1.3228). Your required margin deposit is 1% of the total, which is equal to $1322.80 ($132,280 * 0.01).
As you expected, the Euro strengthens against the dollar and your limit order is reached at 1.3378. The position is closed. Your total profit for this trade is $1500, each pip being worth $10.
Forex Trading: How Does It Work
Overview of Forex Trading
Forex is an exchange that allows investors to trade national currencies through foreign exchange. This is the world’s largest market for currency based on the dollar. Anywhere between 1 and 2 trillion dollars are traded on this market on a daily basis. This type of trade is typically performed online or on the telephone. By taking advantage of the world wide web, you are enabling yourself to make your investments in a reliable, easy, safe, and fast way.
Some investors are able to enjoy returns of around thirty percent on an annual basis. It takes a great deal of experience to gain this type of enormous return on your investment. The Forex market does not have a specific place of trade like many of the other markets do, which is why most of the trade is done by internet, fax, or telephone. In the beginning, currency trade was not all that popular;
they were bringing in only about seventy billion dollars on a daily basis. With the invention of Forex, that number grew massively.
Of course, the currencies do not only deal with the American dollar;
these currencies can be translated into over 5,000 currency institutions world-wide, which include commercial companies, large brokers, international banks, and government banks. Many major countries have forex trading centres such as Frankfurt, London, New York, Paris, Hong Kong, Tokyo, and Bombay, to name a few.
When trading online, there are many benefits, such as the ability to trade or track your investments at anytime, day or night, from anywhere within the world that offers an internet connection. Another added benefit is that some online exchange sites allow you to start with a small investment, known as a mini account, some with as little as two hundred dollars. With online trading, the trade is instant. When you trade offline, you have to deal with paperwork. With online trading, there is no paper work involved.
The world of the internet has allowed us to do many things with just the click of a button. Where else can you bank, trade, talk to your family and friends, research your investments, and earn money all at the same time? Make the internet work in your best interest by implementing online trading into your portfolio. There’s a whole world of money waiting for you to earn with your online investments, and it’s available at the click of your mouse button.
