What is Forex Trading and How Does It Work?

Posted by julesalanna on March 30th, 2017

Forex trading refers to the buying and selling of currencies in order to profit from exchange rate changes. Someone may purchase foreign exchange because they want to buy something overseas. This requires them to have the currency of the country from which they wish to purchase the item. So, they would need to buy some of that country’s currency. Every currency has two rates of exchange – the ask price which is the buying price and the bid price which is the selling price of that currency. The selling price is always higher than the buying price and the difference is called the spread. Forex traders buy and sell currency in order to benefit from this spread.

To participate in the forex market, a retail trader would usually open a CFD account(contract for difference) with a broker. This means that they would “deposit” their investment with the broker who would allow them to trade currencies on margin. Trading on margin is highly risky because of leverage. This means that traders could lose more than they invest. On the other hand, they may also gain more than they invest, which is the goal.

Some brokers allow forex traders to trade with as little as 0. It is best to start with a demo account until you are making consistent profits. The broker buys and sells currency on the trader’s behalf, at or near the rates determined by the large banks. The trader decides which currency pair he would like to trade in and then decides whether he wants to buy a particular currency or to sell that currency. The decision depends on how he believes the quoted currency price will move in relation to the base currency price. If he thinks the quoted currency price will drop in relation to the base currency, he will open a “sell” position. If he believes that the quoted currency will appreciate, he will open a “buy” position. If the currency moves according to the position taken by the trader, a profit will be made. If the currency price moves against him, he will make a loss.