How does Forex trading work?
The process of exchanging one currency for another is continuous. This is due to a number of reasons – from the conduct of settlement transactions between multinational companies to the use of currency for personal purposes, for example, to travel abroad.
A few words in general about currency trading on Forex
The constant need for foreign currency has become the reason for the formation of a single network that allows sellers and buyers to make exchange transactions quickly (from anywhere in the world), and most importantly, around the clock.
The network for carrying out conversion operations (currency exchange) was named in the form of the abbreviation “Forex”, which stands for Foreign Ехchange Markеt – International Currency Trading Market. With the formation and development of Forex, the foundations were laid for a new type of business – currency trading. The profit from this lesson is derived from the exchange rate difference between buying/selling currencies under the influence of the forces of supply and demand.
How is currency trading in the Forex market? Basic concepts
Forex trading is carried out using special contracts called “currency pairs”. Banknotes of any country are designated by three letters. The pair consists of two currencies: in the first place is the base (product), and in the second – the quoted one (the value that reflects the cost of a unit of the product). For example, the rate of the euro/dollar (EUR / USD) pair is 1.45. This means that one euro is worth $ 1.45.
Deals (positions) that traders open on the Forex market are of two types: buy (hoping for growth) and sell (counting on a fall in the exchange rate). Buying is also called a “long position” because, in the context of strategic planning, exchange rates are always going up. Selling, respectively, is a “short position”.
A trader in the Forex market can make money both on the rise and fall of the currency rate
For each pair of currencies, two quotes (values) are presented: “Ask” – the price that the trader must pay to the broker for buying the base currency and “Bid” – the selling price of a certain amount by the trader. For example, if we see that the EUR / USD pair quote is 1.2585 / 89, this means that you can buy euros for dollars at the rate of 1.2589 (“Ask”), and sell euros and get dollars at 1.2585 (“Bid”). The selling price will always be less than the purchase price. The difference is called the “spread” (essentially the commission for the trades). The spread can be fixed and floating. In the example presented, spread = 1.2589-1.2585 = 0.0004 or 4 pips. Point – the minimum price change in the foreign exchange market. One pip for the euro/dollar pair is the change in the fourth decimal place.
Any transaction on the foreign exchange market is expressed in a certain amount of money (size). The size is indicated in lots. One lot is equal to 100 thousand of the base currency (it comes first in the pair). It is not necessary to start trading operations with a whole lot at once. You can also work with fractional options: 0.05 lots (5 thousand of the base currency) or 0.2 lots (20 thousand of the base currency).
It is on which contract a trader is working with that his profit/loss depends. The pip value is always based on the quoted currency (the second in the pair). The formula is simple: the lot must be multiplied by a fraction of a point. For example, if you work 0.5 lots for the EUR / USD pair, then the pip will equal 50,000 * 0.0001 = $ 5. The profit/loss is commensurate with the lot.
How is currency trading in the Forex market: the mechanism of transactions
How the currency is traded on the Forex market: the mechanism of transactions The mechanism of work on the Forex market is simple: let’s say a trader sees a fall on the EUR / USD chart, in other words, the euro is falling against the dollar. Wasting no time, he opens a short position (sell) with a lot size of 0.5 (amount of 50,000 euros). The question arises: if a trader does not have such an amount, where can he get the money? The broker is who provides the trader with the necessary funds. As part of margin trading, the trader is provided with leverage. Operations are possible even if the required amount is not available on the trader’s account. To conclude a deal, it is enough to make a pledge (margin), which is 100-500 times less than the lot volume. For example, a “leverage” of 1: 200 indicates that a trader to buy/sell is 50,000 USD. the amount required is 200 times less. In our example, margin = 50,000 / 200 = 250 c.u. The margin acts as a guarantee of the trader’s solvency.
Let’s continue our example: so let’s say we have $ 350 in our account. Leverage 1: 200, currency pair – EUR / USD; transaction volume – 50,000 euros. Opens a short position at 1.2585 (“Bid”). This means that we sold 50,000 euros at a rate of 1.2585; in the future, you need to buy the same amount, but cheaper. For this transaction, the broker allocates 50,000 * 1.2585 = 62,925 dollars. Deposit = 50,000 / 200 * 1.2585 = $ 314.625.
Let’s say that after a while the price of the euro fell. A decision is made to close the deal (you need to buy). Any position must be closed with an opposite trade. The broker now buys 50,000 euros at a rate of, for example, 1.2580. We get: 50,000 * 1.2580 = 62900. The broker takes the amount of 50,000 euros and stops holding the collateral ($ 314.625), and the trader makes a profit: 62925-62900 = $ 25. Thus, the total deposit increases by $ 25. up to $ 375.
What does a trader need to trade successfully? Do beginners often ask what you need to know and be able to make a profit on Forex?
Not so long ago, only professionals with higher economic education were engaged in trading, however, now anyone can trade. Why, then, can not everyone make a profit?
The main components of a successful market player are: luck, choosing the right broker, as well as strategies, and, of course, knowledge. Trading involves financial risks. Professionals recommend not to rush to open a real trading account, but to open a demo account on Forex. Brokers usually provide free practice accounts.
The trader’s success also depends on the choice of trading methods. Some players work within the day, others use scalping, others prefer overnight trading, and there are those who are guided only by economic news. Of course, it is best if the trader’s strategy includes an analysis of each of the parties influencing the change in exchange rates.
