What is Forex Trading?

You may ask what is Forex Trading? Forex is the exchange that you can buy and sell currencies. E.g. you buy British pounds (by exchanging them to the dollars you had) and after pounds/dollar ratio goes up you sell pounds and buy dollars again. At the end of this process you are going to have more dollars than you had at the start.


The Forex market has much higher liquidity than the stock market because much more money is being exchanged. Forex is spread between the banks all over the world and as a result it means that you can trade 24 hours.


Unlike stocks Forex trades are performed with high leverage which is usually 100. It means that if you invest $1000 you can control $100,000 and therefore increase potential profits. Some Forex Brokers offer mini-Forex accounts where the size of minimum deposit equals $100. So it is possible for traders to enter the market easily.


In Forex trading the name of a "symbol" is composed of two parts - one for the first currency and another for the second currency. E.g. the symbol usdjpy stands for US dollars (usd) to Japanese yen (jpy).


Like with stocks you can use tools of the technical analysis to Forex charts. Trader's indexes can be optimized for Forex "symbols" which allow you to find a winning strategy.


Example for a Forex transaction


Put the case that you have a trading account with $25,000 and you are trading with a 1% margin requirement. The current quote for EUR/USD is 1.3225/28 and you place a market order to buy 1 lot of 100,000 Euros at 1.3228 expecting that the euro will rise against the dollar. At the same time you place a stop-loss order at 1.3178 which means a maximum loss of 2% of your account equity if the trade goes against you - 50 pips below your order price - and a limit order at 1.3378 - 150 pips above your order price. For this trade you are risking 50 pips to obtain 150 pips that is giving you a risk/reward ratio of 1 part risk to 3 parts reward. This means that you only need to be on the right side third of the time to be in profit.


The theoretical value of this trade is $132,280 (100,000 * 1.3228). Your required margin deposit is 1% of the total that is equal to $1322.80 ($132,280 * 0.01).


As you expected the Euro strengthens against the dollar and your limit order is reached at 1.3378. The position is closed. Your total profit for this trade is $1500 and each pip has a worth of $10.