What is Forex Trading?

Forex trading is buying (or selling) the currency of any one country by selling its equivalent value of another country’s currency, known as the ‘base currency’, in the anticipation of its value going up or down in order to make profit. Forex trading is also known as FX trading.

You can trade Forex online through a foreign exchange broker by registering a live account with the broker and funding the account either by transferring money online, paying by credit card, or by mailing in a money order or check.

If you are a beginner forex trader, you should familiarize yourself with what you need to consider before you select your online forex broker. First of all the broker should be registered with a recognized regulating authority and have few or no disputes registered with the regulator. Secondly, the spread, which is how the broker makes a profit on each trade, should be as low as possible, we recommend finding a broker that charges a spread of two PIPs or less if possible. Thirdly, find a broker with a trading software that you like working with. Many brokers will let you open demo accounts so you can try the software before funding your account. Lastly, find a broker with a good reputation and good online reviews.

How Brokers Make Money off your Trades

One PIP is 1/10,000th of a USD (or the currency being traded). The broker will place the buy or sell order 2 PIPS above or below the prevailing market rate depending on your order type (buy or sell).This amount is immediately deducted from the available balance in your trading account irrespective of you making a profit or not. Once your trade covers this ‘spread’ the rest is your profit.

Leverage

Now, when you deposit money with your FX broker you can usually trade from 100 to as much as 500 times (leverage) that amount, which is what makes FX trading so lucrative, risks of loss are, naturally, proportionate to profitability.

The Anatomy of a Trade

Let‘s say you deposit 200 USD (your base currency) and set your leverage to 200 (to play is safe). In this example you can buy or sell 200 (deposit) X 200 (leverage) = 40,000 United States dollars worth of EUR (Euros).

Now, the EUR will increase in value (or decrease) by PIPS. Since one PIP is 1/10,000th of a dollar (or the currency being traded) and you have bought 40,000 USD worth of EUR one PIP works out to approximately 4 USD profit. If the EUR increases in value by 20 PIPS (which can happen multiple times a day) you end up making 20×4 = 80 USD profit with a deposit of 200 USD and all within minutes!

This example is of course just an example, and not all trading days will be profitable, Foreign exchange trading can be risky if you don’t know what you’re doing but if you do it can be a pretty lucrative way to spend your time online.