What Is Forex Trading?
Forex trading is short for Foreign Exchange Trading and as the name implies, it involves the buying and selling of foreign currencies for profit. Different countries use different currencies.
However, if the countries want to buy and sell products and services from each other, there must be a system that determines the value of each country’s currency in order to facilitate the trading process.
A foreign currency exchange rate must be determined which will dictate what each currency is worth when measured against the other currency.
The exchange rate is largely determined by the demand and the supply of each type of currency.
There is a global forex market that facilitates the buying and selling of foreign currencies. This market is the most liquid financial market in the world and the volume of currency traded on a daily basis is correspondingly big. Those who conduct forex trading essentially buy and sell different currencies in order to profit from the spread between the buy price and the sell price of a currency.
For example, a trader who trades the EURUSD currency pair may find that the buy price is 1.2350 and the sell price is 1.2400. The difference between the two prices is 0.0050 (or also called 50 pips), which creates a profit of $500 in case that 1 lot (100,000 of base currency) is traded. The advantge of forex trading is that you can use a financial leverage, for example 1:100, so in case that you would like to trade 1 lot (100,000 of base currency), you can only hold a margin 1000 of base currency on your account.
So the final profit or loss is always based on whether the trade went as predicted and also on the number of units of currency that were traded.
If a trader believes that the value of a particular currency will go up within a specified time versus another currency, he will buy that currency. If he believes that the value will fall during that same timeframe, he will sell that currency.
Forex brokers facilitate the trading of currencies online. If a currency pair moves according to the trader’s predictions within the specified timeframe, he will have made a profit on the trade. If not, he would have made a loss.