Basics of Foreign Exchange Currency Trading

Basics of foreign exchange currency trading

Imagine a market where the average trading volume is in the trillions, the market is open twenty four hours a day, six days per week. The forex market is the largest financial trading market in the world, but for most people, it is something obscure and foreign. As an investment opportunity though, the Forex market offers unlimited potential for profit.

How is Forex Traded

Forex trading is not like the stock market in the sense that it is decentralized. There is no Wall Street for Forex, and investors can be working form a high rise office, or a basement suite in their own home. Most forex trading is done through the use of a broker. Brokers maintain close relationships with the Interbank Market, which is a giant group of the world’s largest banks. When a broker gets an order they pass it to the Interbank, and the order is processed. With the speed of computers and the Internet online brokers like Etoro or Avaya have enabled regular people to capitalize on this investment opportunity.

Also of note, most brokers in the Forex market allow the use of leverage. This mean that a small pool of money can command a large pool of investments, for example if you have 10:1 leverage, your investment of $1000 can command $10,000 in the market.

What are Currency Pairs

The Forex trades currencies, and trades them in pairs. The major currencies are the US Dollar, the Euro, the British Pound, the Yen, the Swiss Franc, the Canadian Dollar, and the New Zealand Dollar. most of Forex trading is made up of a currency pair of the US Dollar or USD and the other currencies, like the USD and JPY (yen). Currency pairs are written in a buy/sell format, for example USD/JPY.

How does Buy and Sell work

When you invest in Forex, you are speculating that the value of one currency will rise or fall in relation to the other currency, so for the USD/JPY you are buying or selling based on the strength of the US Dollar versus the Yen. If you buy the USD with the expectation it will rise against the Yen, it is called going long. If you sell the USD with the expectation that the Yen is going to be worth more it is called going short.

Pips are the key to profits

All of the currencies are stated in decimal points. An example is the USD/GBP valued at 1.2000. If the value of the currency increases to 1.2001 or drops to 1.1999 that is what is known as a pip, or percentage in point. Each pip is worth money, depending on how much you invested. As an example, if you bought $10,000 of USD/EUR meaning $10,000 USD dollars, and the buy rate was 1.0850, and you sell it a week later at 1.0900, you would have made 50 pips in profit, which in this case would amount to forty six dollars.

You can seehow with leverage large profits, and large losses can occur. This should give you a basic understanding of the Forex market and how it works.