Forex Education | What is Forex Trading?

Actually, forex trading activity, it is the same as trading in general, it's just that this trade involves the exchange of two currencies of different types of foreign currencies. For example, you buy British Pound using the US Dollar, then after the ratio Pound / Dollar rises, you sell Pounds and buy Dollar again. At the end of trading, you will have more dollars than before you trade.

What exactly is forex trading

The world's currencies are always in a floating exchange rate (uncertain or changing), where they are always traded in pairs. The forex currency is known in the "symbol" or the abbreviation consisting of two parts; one for first currency, and another for the second currency. For example, the USD/JPY stands for a symbol of the US Dollar (USD) and Japanese yen (JPY). Just like stocks, in the forex you can apply any tools of technical analysis on forex charts. Trader analysis can be optimized with the "symbol" of forex, which helps you to find a profitable strategy.

If you think one currency (called the second currency) will be valued against another currency, then you can exchange that currency, using the currency of the destination (called the first currency), and could do a "transaction" in it. If all goes according to plan, in the end, you will be able to make transactions on the contrary, the exchange (selling / buying) currencies that first one with another, and the gain from the transaction. For the record, in forex trading there are no dividends paid in the currency as happened in the stock market, so that the profits are generally only gain derived from the difference between the buy and sell prices.

Transactions in the Forex Market

Formerly, most of forex trading is limited to large banks and institutional traders only. However, advances in technology today have made small traders can also benefit from the many benefits of forex trading, just by using the Internet or online trading. Currently, the foreign exchange (Forex) market brokers can break down the size of the large inter-bank units into smaller ones. Thus, small traders, like you and me, can have the opportunity to participate to gain profit in the forex market.

Online transactions in the forex market conducted by dealers at major banks or known by the term 'Broker'. Banks, primary dealers, and sometimes also large speculators are major players in this trade. They are can take advantage of the liquidity of the currency market. The forex market has higher liquidity than the stock market due to more money being traded. Forex is spread between banks in the whole world, and this means that the transaction took place for 24 hours straight. Dealers in key institutions also work for 24 hours / 7 days. When you're sleeping comfortably in bed, the dealers in Europe may be actualized trying to trade currency with colleagues in Japan.

In fact, the Forex market never stopped, even during a bombing in the United States, on September 11, 2011, you can still make transactions as usual. The currency market is the largest and oldest financial market in the world. This market is also called the foreign exchange market or can be shortened to the Forex Market. Forex is also the most liquid market in the world. Price movements in the forex market are very smooth and without any gaps (gap) as commonly faced by traders in the stock market. The client may place take-profit and stop-loss order for the broker to be executed automatically when the movement arrived at a predetermined price.

Also, unlike the stock, Forex trading is done with high leverage, for example 1: 100. This means that with an investment of $ 1000, you can control $ 100,000, and increase potential returns. Some brokers also provide mini and micro account, where you can deposit a minimum of less than or equal $ 100. Of course, this is easier for anyone who wants to participate in forex trading.

Examples Forex Transactions

Say, you currently have a trading account of $ 25,000 and you are trading with a 1% margin requirement. The current quote for EUR/USD for example 1.3225/28 and you place an order to buy 1 lot of 100,000 Euro at 1.3228, with the hope the euro will rise against the dollar.

At the same time, you put a stop-loss order at 1.3178 representing a maximum loss of 2% of account equity if the prices going down. The stop loss level is 50 pips below the price order, and take profit is at 1.3378, which is 150 pips above the price order.

Thus, you are risking 50 pips to gain 150 pips. The advantage that you can get is three times greater than the losses incurred. If this can be applied consistently, it can help you to get a bigger percentage gains than losses.

How is the margin? The trade value was $ 132,280 (100,000 * 1.3228). Then the required margin deposit of 1% of the total, amounting to $ 1322.80 ($ 132,280 * 0.01).

Then, for example, as your expectations, the euro strengthened against the dollar and limit orders have to be at 1.3378 then the position will be closed. Thus, the total profit in this trade amounted to $ 1,500, assuming that each pip is worth $ 10.