What is Forex Trading?

Forex trading is a way to trade on the price movements of one foreign currency against that of another foreign currency, say you think the US Dollar will increase against the Euro, you can take a position to back your judgement and get a return should you prove to be correct. If you are incorrect you will lose.

When you trade forex with any of the brokers mentioned on this site you do not physically own the currency, instead you are just speculating on the price movement of a currency pair. By not physically owning the currency you do not have to pay the associated costs of physical ownership such as account management fees, stamp duty nor do you have to wait days for the settlement to occur after a sale. It also means that you are able to sell the asset without having to own it and buy it back at a later stage, known as going short. This allows you to benefit from predicting that a currency will in fact fall in value.

Forex trading is a leveraged financial instrument, enabling you to trade by paying just a small fraction of the total value of the contract, this can be as low as 0.5% of the face value of the trade meaning a US$10,000 trade would only require you to have US$50 (0.5%) available on your trading account. This leverage also means you can significantly increase your return on investment compared to other forms of trading. However the higher leverage can result in losses that could exceed your initial trading deposit. The majority of forex brokers will offer risk management tools, such as stop loss orders, take profit orders, stop entry orders and trailing stop loss orders to enable clients to better manage risk.

Buying in a rising market

If you buy believing a currency pair will rise in value, and in due course your prediction is correct, you can sell the product at a return. However, if you are incorrect and the value falls, you will make a loss.

 

Selling in a falling market

If you sell believing a currency pair will fall in value and your prediction turns out to be correct, you can buy the product back at a lower price at a return. If you are incorrect and the value rises, you will make a loss.

 

The spread

Forex prices are quoted in pairs (e.g. EUR/USD, GBP/USD, USD/JPY) with a buy price and the sell price. The spread is the difference between these two prices. If you think the price is going to go down, you use the sell price. If you think it will go up, you use the buy price. For example, if you were viewing the EUR/USD price, it might look like this:

EUR/USD 1.3744/1.3746
Buy at 1.3746 if you think EUR/USD will rise in value.
Sell at 1.3744 if you think EUR/USD will fall in value.

In this example, the spread for EUR/USD is 2 points.

All the forex brokers on this site offer commission free trading, meaning the ‘cost’ of the trade is the spread on the asset. To learn more about forex trading we recommend opening up a free demo account here.

Your capital is at risk.

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