What Is Forex Trading?

So...what is forex trading?

Forex trading, also known as 'FX trading' or simply 'spot forex', is the simultaneous buying of one currency and selling of another at current prices. For example, buying Gbp/Usd means buying the pound and at the same time selling the dollar, a very simple concept indeed. Currencies as the above are traded in pairs mainly on the interbank (banks) and retail (private traders) market.

Forex trading over the years has become a bit of a frenzy not to say the least. This is because nowadays, it is accessible to anyone who owns a computer with decent Internet speed. Due to this major trend, the forex market has traders all over the globe and operates 24hrs a day Monday to Friday.

The four major currencies are the Eur/Usd, Gbp/Usd, Usd/Jpy and Usd/Chf. You can easily find your trade among one of those currencies day in day out and have the rest of your day doing whatever you like doing best.

You may have come across currency conversion quotes the last time you visited your local bank. It may have been oblivious to you but this piece of data is the most important feature of the foreign exchange market. The market relies on this particular bid/ask quote to work effectively across the globe.

Ok, let’s see how that works…

If you, as a trader decide to acquire Eur/Usd at 1.4021/23, means that bid price of 1Eur is 1.4021Usd and the offer price is 1.4023Usd. In a normal trading day, the bid/ask quote will change hundreds of times. This shows that the market is balancing itself between the buyers and sellers. Note that the difference between the bid and ask is called the spread. In this case it is 2 (1.4023 minus 1.4021). That is the commission you will pay to your broker when taking a position in this particular pair. Commission paid differs from currency to currency.

When taking a position in the Forex market, you buy or sell a certain unit of currency called “lot”. For example buying 1 lot of Eur/Usd means that you are buying 100,000units of Euro. If you buy Eur/Usd at 1.4550 and it appreciates to 1.4580, it means that you have pocketed 30 pips or $300.

(Side note: A pip is a term used to describe a minimum fluctuation or smallest increment of price movement in the foreign exchange world. All profits and losses are expressed in terms of pips.)

“How was the above profit calculated” you ask?

Buying 1 lot of Eur/Usd allows you to buy $145,500Usd (100,000 unit of Euro at $1.4550Usd). When currency appreciates to 1.4580, you now control more dollars than you did previously. Thus, with the same lot, you now control 100,000units of Euro at 1.4580Usd making it $145,800. Profit generated from this transaction will be $145,800 minus $145,500, which equals to $300.

Most forex trading brokers provide a standard lot to their customers. A mini-lot is available too in most cases depending on the amount you want to invest and the broker you are dealing with.

So now that you know what is forex trading, explore the rest of this site and learn more.

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