What is Forex trading? - Forex Basics
Forex, FX, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another. A trader purchases or sells one currency for another with the hope of making a profit when the value of the currencies changes in favor of the trader as a result of events that takes place across the globe. The Forex market has more daily volume than any other market in the world. It is available 24-hours a day, five days a week. Furthermore, the Forex Market is the largest financial market in the world with daily reported volume of over $1.4 trillion.
How is a Forex trade working?
In the Forex market you can buy or sell one currency for another. When you buy a currency, you are saying to be "long" in that currency and when you sell a currency, you are saying to be "short" in that currency. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies in order to make profits - since the objective is to earn a profit from their position. Placing a trade in the foreign exchange market is simple and the mechanics of a trade are virtually identical to those found in other markets. Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of EUR/USD you can close out that position by subsequently going short in one EUR/USD lot (at the prevailing bid price).
Example 1:
A trader buys 1 lot of AUDUSD @ 0.7525.
The position is closed @ 0.7548.
Profit/loss is calculated as (0.7548 - 0.7525) x 100,000 = US$230.
The profit/loss is converted to the account currency by the following calculation: 230/0.7548 = $304.71.
Example 2:
A trader sells 0.5 lots of AUDJPY @ 0.7505.
The position is closed @ 0.7468.
Profit/Loss is calculated as (0.7505 – 0.7468) x 50,000 = JPY18,500.
The profit/loss is converted to the account currency by the following calculation: 18,500/74.68 = $247.72.
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Risk Disclosure: FX Trading Online will not accept any liability for loss or damage as a result of reliance on the information contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets. Currency trading on margin involves high risk and is not suitable for all investors. Before deciding to trade foreign exchange or any other financial instrument you should carefully consider your investment objectives, level of experience, and risk appetite.