What Is Forex Trading Market And How Does It Work?

The Foreign Exchange market is the biggest market in the world. The Forex market exists due to the needs to exchange one currency to another. With a turnover above $3 trillion a day and tradable from Sunday to Friday 24 hours a day you can see how BIG this market really is. The foreign exchange market is mainly traded by large banks, governments, corporations, companies and small speculators (YOU).

How does it work?

Currencies are traded in a pair and the investor’s goal is to make money in movements between two currencies. Speculators mainly invest in the major currencies such as US dollar, Euro, Japan Yen and Great Britain Pound. The main currency pairs traders speculate in are EUR/USD, GBP/USD, USD/JPY and GBP/JPY.

Example: The 5th of March 2009 the EUR/USD rate was 1.2540 which means that one Euro cost 1.2540 US dollar to buy. The speculator buys 100 Euros for 125.40 USD. 14 days later the EUR/USD pair has gone up to 1.3660 which means that one Euro cost 1.3660 US dollars to buy. The speculator could then sell the 100 Euros he/she bought 14 days ago for 136.60 Us dollar with a profit of 11.2 US dollar. That doesn’t sound very much, right?

Leverage

All the brokers use leverage ranging from 10 to 1 up to 500 to 1. Which means that with 100 dollar deposit you can buy or sell currencies for $50000. If you look at the example above that 11.2 US dollar profit could instead be $5600 profit with a leverage of 500 to 1. The leverage also works against you so when you make a loss it’s 500 times bigger with a leverage of 500 to 1. But with good money management and a proper selection of leverage, you can use it to your advantage.

What do I need to start trading and what does it cost?

You need a computer, internet, and information on how to trade. The last one you get on this site. Many brokers offer a demo account, so you can get familiar with the tools and terminology before putting in some real money. The most popular and free software to open a demo account is Metatrader 4. Just do a quick search on google, and start your very first demo account! But DO NOT put in any of your real money yet!