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Learn Forex Trading / Currency Trading Tips
What
Is Currency Trading (FOREX Market)?
What is currency trading? Well, at
its simplest it is exchanging one currency for another, just as you might
do when going on vacation to another country. You trade your
own currency for the currency of the country you are visiting.
However, when people talk about forex (foreign exchange) trading
or currency trading on the forex market, they generally mean
something very different. In this case traders are constantly
exchanging one currency for another (buying currencies and
selling others) with the aim of making a profit when the exchange
rates change.
It is a little like trading in stocks on the stock market.
Stock traders usually buy and sell stocks very quickly compared
with the average personal investor who will take the advice
of a broker but often keep stocks for years or even decades.
How Does Currency Trading Work?
The best way to demonstrate how currency trading makes money
for the traders is to use an example.
Let's say the current rate on the British pound to euro forex
market is this: GBP/EUR 1.1200. That means that to buy one
British pound you will need 1.12 euros. If you believed that
the value of the euro was going to rise compared to the value
of the pound, you might sell 100,000 pounds, buy 100,000 euros,
and wait. Then let's say a few days later, the exchange rate
has moved to: GBP/EUR 1.0600. Sure enough, the pound is now
worth only 1.06 euros. Now if you sell your euros and buy back
100,000 pounds, you will have made a profit of 6% of your investment,
less any fees.
This sounds like a huge amount of money. Who has 100,000 pounds
or even dollars lying around in the bank to trade with? Not
me, and I guess not you either. But fortunately, you do not
have to have all that money for real. You are buying and selling
at the same time, so all you need to have is enough to cover
any loss that might be made before you could exit the market
if your prediction was wrong and the currency that you bought
started to fall. Your broker loans you the rest.
This is called trading margins. On a $100,000 trade the margin
is usually 1% or 2%, i.e. $1,000 or $2,000. This is the money
that you must have in your forex brokerage account.
The amount you trade is determined by 'lots'. A lot may be
worth $10,000 or more depending on the currency and the broker.
So if you want to trade $20,000 you would trade 2 lots and
so on.
There are now limited risk accounts, where you can only risk
the amount of cash you have on account with the broker, thus
avoiding margin calls. This is done by allowing smaller players
to trade forex using 'mini lots' or fractions of a lot. So
you can trade $1,000 by trading 0.10 of a lot. This reduces
risk but may cost more to trade.
More and more ordinary people are getting into currency trading
these days. It has certain advantages over the stock market
and even if you know nothing about valuation of the different
currencies you can set up a forex robot, a complex software
program that will trade for you according to the settings you
choose. Keep in mind that it is a risky business and money
can be lost as well as gained. Knowing what is currency trading
gives you an idea of whether you want to take the next step
towards becoming a currency trader.
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: 2009
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