What is currency trading? Well, at its simplest it is exchanging one currency for another, just as you might do when going on vacation to another country. You trade your own currency for the currency of the country you are visiting.
Forex trading however is currency trading of a whole other order. Traders are constantly exchanging currencies for one another in order to make a profit on the constantly changing exchange rates of global currencies.
Forex trading is something like trading in stocks. Professional stock traders will tend to buy and sell stocks in a very short time, taking advantage of small fluctuations in price rather than buying and holding stocks as the average personal investor would do.
How Does Currency Trading Work?
To explain how money is made in Forex trading, let's see an example.
Let's say the current rate on the British pound to euro forex market is this: GBP/EUR 1.1200. That means that to buy one British pound you will need 1.12 euros. If you believed that the value of the euro was going to rise compared to the value of the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let's say a few days later, the exchange rate has moved to: GBP/EUR 1.0600. Sure enough, the pound is now worth only 1.06 euros. Now if you sell your euros and buy back 100,000 pounds, you will have made a profit of 6% of your investment, less any fees.
This sounds like a huge amount of money. Who has 100,000 pounds or even dollars lying around in the bank to trade with? Not me, and I guess not you either. But fortunately, you do not have to have all that money for real. You are buying and selling at the same time, so all you need to have is enough to cover any loss that might be made before you could exit the market, if your prediction was wrong and the currency that you bought started to fall. Your broker loans you the rest.
This amount of money is called your trading margin. You need to keep this in your Forex brokerage account and it is generally around 1-2% of the value of a trade. For example, for that $100,000 trade, you'd need to have a trading margin of $1,000-$2,000
Forex trades are usually made in the form of "lots", which are usually $10,000. So if you wanted to trade $30,000, this would be three lots and so on.
There are now limited risk accounts, where you can only risk the amount of cash you have on account with the broker, thus avoiding margin calls. This is done by allowing smaller players to trade forex using 'mini lots' or fractions of a lot. So you can trade $1,000 by trading 0.10 of a lot. This reduces risk but may cost more to trade.
The number of people getting into currency trading increases every day. Forex can be more profitable than stock trading. Even if you really know nothing about the currency market, you can set up a Forex robot. This is software which makes trades for you based on your settings. Keep in mind that there is risk involved in Forex trading, just as there is in any kind of investment. Knowing what is currency trading can help you to make the decision of whether currency trading is the right kind of investment for you.
Forex trading however is currency trading of a whole other order. Traders are constantly exchanging currencies for one another in order to make a profit on the constantly changing exchange rates of global currencies.
Forex trading is something like trading in stocks. Professional stock traders will tend to buy and sell stocks in a very short time, taking advantage of small fluctuations in price rather than buying and holding stocks as the average personal investor would do.
How Does Currency Trading Work?
To explain how money is made in Forex trading, let's see an example.
Let's say the current rate on the British pound to euro forex market is this: GBP/EUR 1.1200. That means that to buy one British pound you will need 1.12 euros. If you believed that the value of the euro was going to rise compared to the value of the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let's say a few days later, the exchange rate has moved to: GBP/EUR 1.0600. Sure enough, the pound is now worth only 1.06 euros. Now if you sell your euros and buy back 100,000 pounds, you will have made a profit of 6% of your investment, less any fees.
This sounds like a huge amount of money. Who has 100,000 pounds or even dollars lying around in the bank to trade with? Not me, and I guess not you either. But fortunately, you do not have to have all that money for real. You are buying and selling at the same time, so all you need to have is enough to cover any loss that might be made before you could exit the market, if your prediction was wrong and the currency that you bought started to fall. Your broker loans you the rest.
This amount of money is called your trading margin. You need to keep this in your Forex brokerage account and it is generally around 1-2% of the value of a trade. For example, for that $100,000 trade, you'd need to have a trading margin of $1,000-$2,000
Forex trades are usually made in the form of "lots", which are usually $10,000. So if you wanted to trade $30,000, this would be three lots and so on.
There are now limited risk accounts, where you can only risk the amount of cash you have on account with the broker, thus avoiding margin calls. This is done by allowing smaller players to trade forex using 'mini lots' or fractions of a lot. So you can trade $1,000 by trading 0.10 of a lot. This reduces risk but may cost more to trade.
The number of people getting into currency trading increases every day. Forex can be more profitable than stock trading. Even if you really know nothing about the currency market, you can set up a Forex robot. This is software which makes trades for you based on your settings. Keep in mind that there is risk involved in Forex trading, just as there is in any kind of investment. Knowing what is currency trading can help you to make the decision of whether currency trading is the right kind of investment for you.
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About the author: Jack Sawyer can help you locate the greatest Forex Software. For more information on Forex Trading Online go to http://www.forex-product-review.com.
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