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The Basics of Forex Trading

You may have heard of Forex trading – the trading of currencies on the foreign exchange market.  It has become increasingly popular over the past few years for individuals to do Forex trading because there are large profits to be had if you know what you are doing.  However, trading in the Forex market is very different from trading on a basic stock exchange, and so here is what you need to know.

How To Get Started

Before you start Forex trading, you need to check if your broker has a Forex broker platform.  Many do, but some do not, in which case you need to find a brokerage that has Forex trading.

Once you have a brokerage that has a Forex platform, you need to fund your account.  It is important to remember that Forex involves substantial risk due to both margin requirements and the leverage involved in the product itself.

For example, if the margin requirement is 0.25%, you can invest $100, and immediately purchase a position worth $40,000.  That is a huge position and how leverage works in Forex.

Placing a Trade

 When you are ready to place a trade, you need to know how it works.  All currencies are traded in pairs – meaning you sell one currency and purchase another.  For example, EUR/USD is one of the most popular pairs, with it currently trading at around 1.3000.  This means that 1 Euro is exchanged for 1.3000 US Dollars.  You’ll notice that currencies are traded out to the 0.0001 decimal, except for the Japanese Yen, which only goes out to 0.01.

If you want to place a trade for this spread, let’s see how it would work.   Let’s say you want to have a position of $10,000, but with 1% leverage you only need to deposit $100 in your account.

With that $100, you buy EUR10,000 and sell $13,000 USD.  If you hold your position overnight, you will be charged interest – which you can either make or lose depending on which rate is higher.

Finally, the rate changed to 1.3500 in the morning, and you want to take your profit.  You close your position by selling your EUR10,000 and you now buy back the USD at 1.35, so $13,500.  You just turned your initial $100 investment into $500!

 

 

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