Forex Trading - Explained

By: Praveen Ortec

Forex traders or FX traders trade currencies to make profits. They buy and sell currencies including both native and foreign currencies with respect to the changes in exchange rate of one currency to another. Forex traders buy a currency for lesser amount of one currency and sell that to earn greater amount of the currency. Forex trades are done in pairs known as "currency pairs". Each nation's currency carries a special triletter currency code like JPY for Japanese Yen and USD for United States Dollar. Each currency pair is represented as JPY/USD, which mean the trader start trading by buying USD spending JPY.

The calculation of profit or loss in forex trading exclusively depends on the increase or decrease in the exchange rate of the second currency (one first brought) to the first one in the currency pair. If the exchange rate increases the trader is profited, if that goes in opposite way then loss. In order to reduce the possible loss associated with any forex trade, the trader can place stop-loss orders and can configure alerts.

As a result of the high liquidity (the market stability) present in the market most forex brokers offer high leverages for trading currencies. Leverages enable traders to trade on margin that is trade in large amount with fewer amounts in the account. Most forex brokers offer leverage on or beyond 100:1 that is with $1 (or any other currency) in the account, the trader can borrow up to $100 from his broker for trading.

Today almost all forex trades by individual trades are carried out online using sophisticated trading systems. These trading systems include both web-based or broker-side forex trading systems and direct access or stand-alone forex trading systems. The choosing of the type of trading system solely depends on the trading necessities of the trader. If the trader is an infrequent trader or long-term trader then the web-based trading softwares are more useful; if he or she is an active trader or day trader then the direct access trading softwares is the best. Now a days, both types of systems are offered by forex brokers free of charge, some ask you to fulfill certain minimum requirements.

Unlike stock exchanges there is no actual exchange for trading currencies. Thus all the trades are executed in a more advanced and automated trading practice called OTC (Over The Counter) trading. This type of trading involves broker-dealer interactions and price negotiations. Traders directly or via brokers places their orders to market makers, whose automated software executes the trade by matching the ask and bid prices. This type of trading minimizes human requirements. All contracts traded in forex market are standardized for facilitate traders to do detailed analysis. There are mini and standard forex contracts available.

Foreign Exchange
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Foreign Exchange