What Is Forex Trading and How Does It Work?

Have you been hearing about Forex trading and its ability to make you money?

Maybe you have witnessed others reaping the benefits of this form of trading and have been wondering what is forex trading and how does it work?

It’s estimated that Forex turnover is as much as 4 trillion dollars daily. That is a lot of money! If you want to get in on the action then here is a guide that will help you.

1. What is Forex Trading and How Does It Work?

Forex trading involves the buying and selling of two currencies at the same time. If the currency you buy increases in value against the currency sold, then you will make a profit. If the currency you buy decreases in value against the value of the one sold, then you will undertake a loss.

2. How Does Forex Trading Take Place?

Forex currencies are usually quoted in pairs so that it is easy to tell which currency is bought and which currency is sold. The initial currency in any Forex pair is the base currency and the other currency is known as the counter or quote currency.

For example, AUD/USD would be considered a pair. The Australian dollar would be the base currency and the American dollar the quote currency. The price of the pair is dependent on the value of the base currency in the quote currency.

3. Introducing The Spread

The spread is one of those terms you must understand in order to truly comprehend, what is Forex trading and how does it work. When you get into Forex trading you will be presented with three prices for the currencies that you are buying and selling.

The three prices are the market value, the buying price, and the selling price. The difference between the buying price and the selling price of a Forex pair is called the spread. The amount of this difference can severely impact profitability.

4. The Pip Movement

When a forex pair incurs an increase or decrease in price the movement is measured in pips. For example, if the value of the Forex pair of AUD/USD moved from AUD 3. 45671 to USD 3. 45681. The movement of the fourth digit after the decimal point from 7 to 8 is a pip.

As you can see a pip creates only a very small movement in the price of the Forex pair. In order to see any real profit one of your Forex strategies should be to trade in lots. Lots contain large batches of Forex pairs. Lots can contain as little as 100 units to as much as 100000 units of base currency.

You can use leverage to get a large number of lots. Leverage is the borrowing of money to invest in trading. You can borrow the money you need from a Forex broker.

Final Thoughts

Now that your questions about what is Forex trading and how does it work have been answered, you are probably ready to dive in and become a foreign exchange trader. It is important that you take the time to decide which currencies you want to use as pairs to secure profits.

If you would like more guidance on how to increase your profits with Forex trading, please visit our blog. You will find information that will help to make your Forex trading successful.

This article was written by our in-house forex traders with a combined 20+ years of experience in trading the financial markets.