What is Forex Trading? - Learn the Basics


What is Forex Trading? Forex Trading, Currency Trading, FX, Foreign Exchange are terms that have the same common meaning, that is trading of the world's many currencies. A currency trade can be thought of as simultaneous buying and selling of currency. Forex Trading has a very wide scope. The Forex Market has daily trading that amounts to $3 trillion. Forex Trading is quite similar to Stock trading except the fact that there is no central market where you can trade. Trading is done on the interbank market which can be thought of as an Over the Counter market.

Now let us start with the basics of Forex Trading. In Forex Trading a trade is a buying and selling of a currency simultaneously. Currency combinations that are used in a trade are known as a cross. Majors are the most common currency crosses that are traded and these are EURUSD, USDJPY, USDCHF and GBPUSD. Spot market is the most important Forex Market and it is known so because here the trades are settled immediately on the spot.

On thing that most people do not known about in Forex trading is the concept of Forward Outrights. In forward outrights the trade is completed immediately but there is need to calculate an interest as you have opted to trade on a future date. This interest may work for or against you in cases where you have a lot of time delay in your forward outright. For example if you trade between USD and NOK where you borrow money in US (where interest rate is low) and trade in Norway (where interest rate is high) you could get a positive rate differential that could get you more money. But you may be charged interest if you have a negative interest differential.

Another very important concept when it comes to trading in Forex is that of Trading on Margin. Trading on Margin is a concept that says that you can trade more money on the market than is available in your account. This means that if you have a margin of 1% and an account balance of $100 then you can trade for $100,000 on the market as $100 is 1% of $100,000. This can work in your favor but can also work against you and can cause huge losses if the margin is set too high.

There are two more important terms related to Forex Trading. These are pips and spreads. A pip is the smallest amount of money by which a quote price gets changed. A spread on the other hand is the difference between the bid price(sell) of the currency and its ask price(buy). A 3-pip spread on a major can be thought of as a difference of $0.0003 between the bid price and ask price.

The next part is how to trade on the market. Let us take an example, suppose you think that the Euro would strengthen against the dollar so you decide on buying the Euro and sell it later. Suppose the bid price is 0.9875 and ask is 0.9878. This means that you can sell Euro at 0.9875 and buy at 0.9878. Suppose you buy euro 100,000 at 0.9878. Later the market turns in favor of the euro and the EURUSD is now quoted at Bid 0.9894 and Ask 0.9896 and you sell it at 0.9894. This means you have made a profit of 0.9894 minus 0.9878 multiplied by 100.000 = USD 140. The same is the case if you think the euro will weaken against the dollar. Except in this case you sell Euro instead of buying and when the Euro falls you buy it back again at lower price.

These are the basics of Forex Trading. It may seem to be quite simple but to make some serious profits you would have to make your own strategy while investing. To do this you need to study the market, analyze market trends, understand market fluctuations and then incorporate these into your strategy. This is not so easy for a new beginner. So one may take help of an automated Forex Trader.