Forex – also known as the currency market or FX – is one of the most widespread financial markets in the world, with over 5 trillion dollars traded every day.
What is Forex Trading?
Forex Trading or currency trading means actually buying or selling one against the other for speculative purposes, out of necessity (trade) or for protection against currency risk. Forex traders are trying to take advantage of fluctuations in exchange rates between 2 currencies, speculating whether the value of one currency, such as the pound, will rise or fall relative to another, such as the US dollar. The most popular global forex trading platform is MetaTrader 5 offered by most forex brokers today.
With over 5 trillion dollars in foreign currency traded daily worldwide, the foreign exchange market is the most traded in the world, making it an extremely liquid and dynamic market.
This high liquidity of the market means that prices can change rapidly in response to short-term news and events, available in real time on the well-known forexfactory news portal, creating multiple trading opportunities for traders.
Why is Forex Trading Popular?
- Trade also on the appreciation and the depreciation of the course (in both directions)
- Trade in the margin, using a small amount of money to control a much larger position
- Trade 24 of 24, 5 days of 7
- Trading at low costs (spread or the difference between the sale price and the purchase price), due to the huge liquidity
- Currency prices are constantly varying with each other, frequently offering trading opportunities
How does Forex Trading work?
Forex is always quoted in pairs, practically the evolution of one currency against another. Take, for example, GBP / USD (British Pound to US Dollar) – fluctuations in the exchange rate between these two make a profit. The first currency, also known as the base currency, is the one you think will rise or fall relative to the second currency, which is known as the quoted currency.
When trading currencies, you can speculate on the future direction of the market by taking a long (buy) or short (sell) position, depending on what you think will happen to that exchange rate.
Forex Trading Example (Euro vs Dollar)
The euro is the base currency, and the US dollar is the quoted currency. If the price of the EUR / USD pair is 1.06325 it means that 1 euro equals 1.06325 dollars.
If the number increases, this means that the Euro is becoming stronger compared to the US Dollar.
If the number goes down, this means that the US dollar is growing stronger compared to the Euro.
Buy Eur / Usd
When trading currencies through a platform such as MetaTrader, you would buy a currency pair if you thought the base currency would strengthen against the listed currency, or the currency would weaken against the base currency.
So, if we think that the euro will strengthen against the US dollar, then we would place a purchase order on the MetaTrader platform or we would go “long”.
For every point or pip through which the Euro appreciates in relation to the Dollar, we will make a profit.
It is important to remember that, if the euro rate were to weaken against the US dollar, we would incur a loss for each pip (minimum change – fourth decimal of course).
Sell Eur / Usd
Alternatively, you would sell a currency pair if you think the base currency will weaken against the listed currency or the exchange rate will depreciate.
If we believe that the euro will fall in value against the US dollar, we would carry out a sale transaction and for every minimum depreciation of the Eur against Usd, you will make a profit. If the value of the euro increases against the dollar, you will incur a loss.