Forex Trading 101 - Understanding How Forex Works
Forex Trading is simple enough; you are buying and selling currencies. The fundamentals of trade in the Foreign Exchange Market are not all that different from the Stock Market so if you have experience trading there, you will catch on quick with Currency Exchange.
The aim in Forex Trading is to exchange one currency for another expecting the value of the currency you purchased to
appreciate on a future date so that you can sell it and make a profit.
(EpSos .de / Flickr / CC-BY-SA)
Forex trading is carried out in pairs. There are 7 major currency pairs (all of which have USD in them), although there are many other pairs available with different currencies from which you can choose. A pair is essentially made up of a base currency on the left side of the “/” and the quote currency on the right side of it:
Base Currency/Quote (or) Counter Currency
Some examples of currency pairs are EUR/USD, USD/JPY, AUD/USD.
When you execute a trade, you will receive a Forex quote which gives you an exchange rate between the two currencies in the pair. It looks something like:
EUR/USD = 1.2866
In the quote above, EUR or Euro is the base currency while USD or US Dollar is the counter currency. The quote states that you need to spend 1.2866 dollars to purchase 1 Euro. Alternatively, if you were selling here, you will get 1.2866 USD for every 1 Euro that you sell.
A working example:
You decide to execute a trade in the EUR/USD pair and buy 10,000 Euros at an exchange rate of 1.2866. You pay up 12,866 USD (10,000 Euro X 1.2866).
3 Weeks on you find that the exchange rate for EUR/USD has gone up from 1.2866 to 1.3300. You quickly sell the 10,000 Euros you had purchased and buy back US Dollars. You will now be in possession of USD 13,300, earning a net profit of USD 434.
Here’s another example:
Let’s say that you are trading in EUR/USD. You realize that the US economy is not doing so well, so in all probability, the value of USD will depreciate within 1 week or so. In such a case, you will buy EUR/USD, meaning you will purchase Euros by selling your Dollars in the hopes that when the value of the Dollar falls, you can sell EUR/USD and make a profit.
And that is essentially how you make money in Forex. But just how do you predict if a certain quote is going to appreciate? Now we are getting into the right of stuff!
Accurately predicting how the Forex market will evolve (or devolve) is how people become millionaires. You need to understand that every time you purchase a currency, you are essentially investing in the country or countries to which it belongs. Therefore, learning as much as possible about the financial situation of the markets that you are invested in is pivotally important.
As different markets often affect one another, having a good grasp on the latest global economic scenario will also help you get more winning trades under your belt. The best Forex traders are the most fervent news followers on the planet and if you want to join their ranks, then this is a habit that you will have to develop.
Most broker websites, where you buy and sell currency, will also offer relevant news feeds so that you can keep yourself as up to date as possible while you are placing your trades, so make sure you use that feature.
The aim in Forex Trading is to exchange one currency for another expecting the value of the currency you purchased to
appreciate on a future date so that you can sell it and make a profit.
(EpSos .de / Flickr / CC-BY-SA)
Forex trading is carried out in pairs. There are 7 major currency pairs (all of which have USD in them), although there are many other pairs available with different currencies from which you can choose. A pair is essentially made up of a base currency on the left side of the “/” and the quote currency on the right side of it:
Base Currency/Quote (or) Counter Currency
Some examples of currency pairs are EUR/USD, USD/JPY, AUD/USD.
When you execute a trade, you will receive a Forex quote which gives you an exchange rate between the two currencies in the pair. It looks something like:
EUR/USD = 1.2866
In the quote above, EUR or Euro is the base currency while USD or US Dollar is the counter currency. The quote states that you need to spend 1.2866 dollars to purchase 1 Euro. Alternatively, if you were selling here, you will get 1.2866 USD for every 1 Euro that you sell.
A working example:
You decide to execute a trade in the EUR/USD pair and buy 10,000 Euros at an exchange rate of 1.2866. You pay up 12,866 USD (10,000 Euro X 1.2866).
3 Weeks on you find that the exchange rate for EUR/USD has gone up from 1.2866 to 1.3300. You quickly sell the 10,000 Euros you had purchased and buy back US Dollars. You will now be in possession of USD 13,300, earning a net profit of USD 434.
Here’s another example:
Let’s say that you are trading in EUR/USD. You realize that the US economy is not doing so well, so in all probability, the value of USD will depreciate within 1 week or so. In such a case, you will buy EUR/USD, meaning you will purchase Euros by selling your Dollars in the hopes that when the value of the Dollar falls, you can sell EUR/USD and make a profit.
And that is essentially how you make money in Forex. But just how do you predict if a certain quote is going to appreciate? Now we are getting into the right of stuff!
Accurately predicting how the Forex market will evolve (or devolve) is how people become millionaires. You need to understand that every time you purchase a currency, you are essentially investing in the country or countries to which it belongs. Therefore, learning as much as possible about the financial situation of the markets that you are invested in is pivotally important.
As different markets often affect one another, having a good grasp on the latest global economic scenario will also help you get more winning trades under your belt. The best Forex traders are the most fervent news followers on the planet and if you want to join their ranks, then this is a habit that you will have to develop.
Most broker websites, where you buy and sell currency, will also offer relevant news feeds so that you can keep yourself as up to date as possible while you are placing your trades, so make sure you use that feature.