Trade Forex Trading

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What is Forex - About Forex Trading

forex trading or Forex is the trading of currencies from different countries against each other. For example when traders in Great Britain want to trade with traders from the USA, then the Great Britain Pound currency is exchanged for the US Dollar currency to facilitate this international trading.

How Forex Trading Works

forex trading is carried out through a Forex broker. A Forex trader has to open a forex trading account with a broker of their choice and after opening this account a trader can then trade any forex currency they want.

A trader will choose to trade a currency that they expect to appreciate in value. This way a trader can then profit from the currency moves. For example a trader may open a buy trade of EURUSD currency pair. If the trader opens the trade at exchange rate of 1.2500 and the EURO currency then appreciates and the exchange rate changes to 1.2600 then this would be a 100 pip gain on the trader’s part. If a trader was trading one standard lot which has a profit of $10 per pip, then the currency trader would have made a total profit of 100 pips multiplied by $10 per pip which would be a total of $1,000.

This is how profit is made by trading Forex currencies.

Leverage

Because forex is traded in lots and the standard lot is $100,000 units of currency which most traders cannot afford, there is the provision of leverage in Forex.

Leverage in forex means that a trader is only required to deposit only a small percentage of the total transaction they will be trading. For example the leverage option of 100:1 mean that a trader can borrow up to 100 times what their capital is. Therefore a trader will only require to deposit $1,000 in their account and if they borrow using the 100:1 leverage option they can trade a total of $1,000 multiplied by 100 times (leverage 100:1) therefore the total amount that the trader will be controlling will be equal to $100,000. This means that a currency trader that has only $1,000 dollars capital in their account can open a standard lot of $100,000 units of currency.

This leverage makes forex accessible to retail traders as retail traders can trade with little of their money and borrow the rest using this leverage option.

Leverage is provided to a Forex trader by their Forex broker. A trader will specify the leverage they want when opening a forex account. A trader can choose the 100:1 leverage or 200:1 leverage or even 500:1 leverage.

However, a trader should know the higher the leverage they choose the higher the profit they can make and also the higher the losses they can make. Therefore, traders should make sure they understand what is leverage and how to properly trade with this leverage by learning forex money management rules that are used to by experienced forex traders to manage how to trade using this leverage.

Leverage gives forex traders a big advantage when trading currencies as compared to trading other financial markets. A trader trading forex can trade up to 100 times their capital while a trader trading the stock market can only trade with the amount of capital in their account.

With this leverage and the ability to multiply trading capital that a trader can trade with mans that forex traders can make profit more quickly than other traditional markets. However, a trader can also make losses more quickly than when trading other traditional market because leverage multiplies profits as well as losses.

Placing Currency Trade in the Forex Market

A currency will place their trades with their broker; the forex broker will then connect the trader to the interbank market by placing these trades directly to the interbank network. Once the trader wants to close the trade the trader will close the trade with their forex broker and their forex broker will then close this trade in the interbank market and then credit the trader’s account with the profit or loss made from the trade transaction.

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