Skip to content Skip to sidebar Skip to footer

What Is Forex Trading And How Does It Work?

Forex trading is the process of speculating on currency prices to potentially make a profit. Currencies are traded in pairs, so by exchanging one currency for another, a trader is speculating on whether one currency will rise or fall in value against the other.

The value of a currency pair is influenced by trade flows, economic, political and geopolitical events which affect the supply and demand of forex. This creates daily volatility that may offer a forex trader new opportunities.

Online trading platforms provided by dunia brokers like FXTM mean you can buy and sell currencies from your phone, laptop, tablet or PC.

What is an online forex broker?

An online forex broker acts as an intermediary, enabling retail traders to access online trading platforms to speculate on currencies and their price movements.

Most online brokers will offer leverage to individual traders, which allows them to control a large forex position with a small deposit. It is important to remember that profits and losses are magnified when trading with leverage.

FXTM offers a number of different trading accounts, each providing services and features tailored to a clients’ individual trading objectives.

Discover the account that’s right for you by visiting our account laman. If you’re new to forex, you can begin exploring the markets by trading on our demo account, risk-free.

Forex offers many benefits to retail traders.

You can trade around the clock in different sessions across the globe, as the forex market is not traded through a central exchange like a stock market. This means you can jump on volatility, wherever it happens. High liquidity also enables you to execute your orders quickly and effortlessly.

Trading forex using leverage allows you to open a position by putting up only a portion of the full trade value. You can also go long (buy) or short (sell) depending on whether you think a forex pair’s value will rise or fall.

Forex trading offers constant opportunities across a wide range of FX pairs. FXTM’s comprehensive range of educational resources are a perfect way to get started and improve your trading knowledge.

All transactions made on the forex market involve the simultaneous buying and selling of two currencies.

This ‘currency pair’ is made up of a base currency and a quote currency, whereby you sell one to purchase another. The price for a pair is how much of the quote currency it costs to buy one unit of the base currency. You can make a profit by correctly forecasting the price move of a currency pair.

FXTM offers hundreds of combinations of currency pairs to trade including the majors which are the most popular traded pairs in the forex market. These include the Euro against the US Dollar, the US Dollar against the Japanese Yen and the British Pound against the US Dollar.

The table below looks at the most traded currency pair in the forex market.

The base currency is the first currency that appears in a forex pair and is always quoted on the left. This currency is bought or sold in exchange for the quote currency and is always worth 1.

So, based on the example above, it will cost a trader 1.1918 USD to buy 1 EUR. Alternatively, a trader could sell 1 EUR for 1.1916 USD.

When you are trading forex, you are always buying one currency and selling another at the same time.

The second currency of a currency pair is called the quote currency and is always on the right. In EUR/USD for example, USD is the quote currency and shows how much of the quote currency you’ll exchange for 1 unit of the base currency.

When you are trading forex, remember you are always trading a pair - so you are selling one to buy another.

The bid price is the value at which a trader is prepared to sell a currency. This price is usually to the left of the quote and often in red.

The bid price is given in real time and is constantly updating as it is a live market.

The ask price is the value at which a trader accepts to buy a currency or is the lowest price a seller is willing to accept. This is usually to the right and in blue.

The ask price is given in real time and is constantly changing as it is a live market.

As a forex trader, you’ll notice that the bid price is always higher than the ask price. The difference between these two prices is the spread. In other words, it is the cost of trading. The narrower the spread, the cheaper it costs. The wider the spread, the more expensive it is.

For example, if EUR/USD is trading with an ask price of 1.1918 and a bid price of 1.1916, then the spread will be the ask price minus the bid price. In this case, 0.0002.

In order to make a profit in foreign exchange trading, you’ll want the market price to rise above the bid price if you are long, or fall below the ask price if you are short.

A point in percentage – or pip for short – is a measure of the change in value of a currency pair in the forex market.

It is the smallest possible move that a currency price can change which is the equivalent of a ‘point’ of movementBase Currency

The base currency is the first currency that appears in a forex pair and is always quoted on the left. This currency is bought or sold in exchange for the quote currency and is always worth 1.

So, based on the example above, it will cost a trader 1.1918 USD to buy 1 EUR. Alternatively, a trader could sell 1 EUR for 1.1916 USD.

When you are trading forex, you are always buying one currency and selling another at the same time.Quote currencies

The second currency of a currency pair is called the quote currency and is always on the right. In EUR/USD for example, USD is the quote currency and shows how much of the quote currency you’ll exchange for 1 unit of the base currency.

When you are trading forex, remember you are always trading a pair - so you are selling one to buy another.Bid Price

The bid price is the value at which a trader is prepared to sell a currency. This price is usually to the left of the quote and often in red.

The bid price is given in real time and is constantly updating as it is a live market.Ask Price

The ask price is the value at which a trader accepts to buy a currency or is the lowest price a seller is willing to accept. This is usually to the right and in blue.

The ask price is given in real time and is constantly changing as it is a live market.Spread

As a forex trader, you’ll notice that the bid price is always higher than the ask price. The difference between these two prices is the spread. In other words, it is the cost of trading. The narrower the spread, the cheaper it costs. The wider the spread, the more expensive it is.

For example, if EUR/USD is trading with an ask price of 1.1918 and a bid price of 1.1916, then the spread will be the ask price minus the bid price. In this case, 0.0002.

In order to make a profit in foreign exchange trading, you’ll want the market price to rise above the bid price if you are long, or fall below the ask price if you are short.Pips

A point in percentage – or pip for short – is a measure of the change in value of a currency pair in the forex market.

It is the smallest possible move that a currency price can change which is the equivalent of a ‘point’ of movement

For most currency pairs, a pip is the fourth decimal place, the main exception being the Japanese Yen where a pip is the second decimal place.

On the forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Of course, such large trading volumes mean a small spread can also equate to significant losses.

Trading forex is risky, so always trade carefully and implement risk management tools and techniques.

Post a Comment for "What Is Forex Trading And How Does It Work?"