How does forex trading work?

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Forex trading is the act of trading currencies from different countries against each other. Forex is acronym for foreign exchange.

For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States, the currency in circulation is called the US Dollar (USD).

An example of a forex trade is to buy the Euro while simultaneously selling the US Dollar. This is called going long on the EUR/USD.

Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you feel is going to change in value and place a trade accordingly.

Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position.

When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen in seconds.

The main enticements of currency dealing for private investors and attraction for short-term forex trading are:

• 24-hour trading, 5 days a week with non-stop access to global forex dealers.
• An enormous liquid market making it easy to trade most currencies.
• Volatile markets offering profit opportunities.
• Standard instruments for controlling risk exposure.
• The ability to profit in rising or falling markets.
• Leveraged trading with low margin requirements.
• Many options for zero commission trading.

To know if you made a good investment in forex trading, one needs to compare this investment option to alternative investments.

At the very minimum, the return on investment (ROI) should be compared to the return on a 'risk-free' investment. One example of a risk-free investment is long-term US government bonds since there is practically no chance for a default, i.e. the US government going bankrupt or being unable or unwilling to pay its debt obligation.

When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling.

 

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