How Does Online Foreign Exchange Trading Work?

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Tuesday, January 22, 2019 5:00PM / Sponsored Post / Content & Image by Justforex


Forex is a good way to earn extra income. However, in order to trade in the Forex market, it is necessary to have not only interest in this and some funds, but also know the basics of how Forex trading takes place. Let's consider this issue. 

Forex trading on a simple example

When currencies are exchanged, each of them has a specific price: the exchange rate. As in the case of any other commodity, the price of a currency is determined by the supply and demand. If there is a high demand for a certain currency – for example, many people or companies want to change the currency of their country to the dollar, then the value of the dollar will rise, and the exchange rate to other currencies will change. You can use this principle to make a profit. For an example, let's take as an example a vacation trip. 

Imagine that you live in Germany and go on vacation to California. You need to exchange euros into the US dollars. When exchanging, you get $1.50 for one euro. You change €500, therefore, you are given $750. 

In three weeks you go back home, but you have $250 left. Since you no longer need dollars, you change them back to euros. At the same time, you notice that the price of the euro against the dollar has changed - now the exchange rate is $1.25 for one euro, so you get about €200. If the exchange rate stayed at $1.50, you would get only about €166. So you made a profit. The similar is the process of trading on Forex. 

Basic concepts of Forex Trading

Trading on the Forex market is carried out with the help of special instruments called “currency pairs”. The pair consists of two currencies: in the first place is the base currency (commodity), and in the second – the quoted one (the value of which reflects the price of the base currency). For example, the rate of the EUR/USD pair is equal to 1.45. This means that one euro is worth $1.45. 

Transactions (positions) that traders open in the Forex market are of two types: for the purchase and for the sale. The purchase order is also called a “long position” because, in the context of strategic planning, exchange rates are always rising. The sale one is a "short position". A trader in the Forex market can earn both on growth and on the fall in the exchange rate.

There are two prices for each currency pair: “Ask” is the price that the trader must pay to the broker for the purchase of the base currency and “Bid” is the selling price. For example, if we see that the EUR/USD pair quotation is equal to 1.2585/89, this means that you can buy euros for dollars at the rate of 1.2589 (“Ask”), and you can sell euros and get dollars at 1.2585 ("Bid"). The selling price will always be less than the purchase one. The difference is called the "spread." Spread can be fixed and floating. In the presented example, the spread = 1.2589-1.2585 = 0.0004 or 4 points. A point is the minimum price change in the foreign exchange market. JustForex is one of the reliable brokers in the international market offering good trading conditions. 

Any transaction in the foreign exchange market is expressed in a certain amount of money (size). The size is specified in lots. One lot equals 100 thousand base currency. It is not necessary to start trading operations at once with a whole lot. You can work with fractional options: 0.05 lots or 0.2 lots. 

The mechanism of work in the Forex market is simple: for example, a trader sees a drop in the EUR/USD chart, in other words, the euro falls against the dollar. Without losing time, he opens a short position (sale) with a lot size of 0.5 (amount of 50,000 euros). The question arises: if the trader does not have such an amount, where to get the money? 

A broker provides leverage for the trader. With leverage, transactions can be opened even without the required amount on the trader’s account. To open a transaction, it is enough to deposit a margin, which is 100-500 times less than the volume of the lot. For example, the 1:200 leverage indicates that in order to buy/sell $ 50,000 the trader needs 200 times less. In our example, margin = 50000/200 = 250 dollars.



These are general concepts about forex trading. Having dealt with the basics, you can move on and comprehend this process. Starting trading is better with practice demo accounts, which do not need real money. Trading on them is carried out through virtual funds, but the profits are also virtual. However, demo accounts will help you to better understand the trade and your mentality. 

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