What is Foreign Exchange Trading?

Quite simply foreign exchange trading is the trading of world currencies in pairs. For example currency pairs are shown as EUR/USD. This means that you would sell USD to buy Euro. The foreign exchange rates fluctuate on a daily basis dependent on the political, economic and business environment domestically as well as internationally. Based on these conditions you would choose to either sell the currencies or buy currencies.

If you are dealing in EUR/USD currency and believe that the Euro rate is likely to rise, then you would buy the Euros and sell USD. On the other hand if you think that the Dollar rate is likely to increase, then you would buy USD and sell the Euros. The forex market is extremely risky and traders need to be very careful.

The forex market is the world's largest market that trades 24 hours a day. The daily volume of the trade is $3.2 trillion and is larger than the equities market. As a trader you would buy and sell the currencies with the help of leverage. When you use leverage, the gains and the losses due to currency fluctuation is magnified.

You should trade forex on margin after you have carefully considered your investment objectives, your risk appetite and have gained a level of experience. Seek the advice from another financial advisor if you are in doubt.

Most of the firms won't charge you a trading commission; rather they will take the difference between the bid and ask rates. Currency rates are always shown as Bid/Ask rates. If the current rate quoted for EUR/USD is 1.26985/701, it means that you would get 1.26985 Euros, if you were sell 1 USD. While you would get USD 1.26701 if you were to sell 1 Euro. The difference between the ask and the bid rate is known as the spread (the profit or loss) that would be made by the dealer.

Lets take the example of Euro and USD

EuroUSD

Bid Ask

1.4874 1.4879

Sell Buy

In this example the bid price is 1.4874 and the ask price is 1.4879. When the trader pushes the sell button, he would get $1, when he sells 1.4874. While the trader will have to buy 1 Euro by selling 1.4879 USD. Now if you think that the US economy is going to weaken further, then you will sell USD and buy Euros. The trader will anticipate that the Euro will increase in the future. The trader will sell the Euros at a later date and book the profit. If the trader believes that the USD will rise, then he will sell the Euros and proceed accordingly.

Operating on margin money

Traders operate on a margin account online. Margin account simply means that you can operate larger transactions with relatively less cash. For example you can trade 100 times the amount. By keeping $1000 in the margin account, you can trade $100,000 worth of transactions.

Interest rollover charges

Trading is also done in "lots." Since you can't trade a single euro or a dollar, there are minimum lots in which you can transact. Lots can come in 10,000 or 100,000 units of a currency. Interest rollover charges are incurred as a part of forex trading. Interest is always levied on the currency that is borrowed and the earned on the currency that is been bought. It's important to ask your broker/ dealer for the interest charged and the procedures for debiting and crediting your account for the same.

If you find forex trading difficult, you can open a demo account with a number of brokers online for free. When you think that you has understood the way the forex market operates, you can start trading in the real market.