How does forex trading work?

By BankBazaar.com | December 9, 2011

Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

Forex Trading is the act of trading currencies from different countries against each other. Forex is acronym for Foreign Exchange.

For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called going long on the EUR/USD.

Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you feel is going to change in value and place a trade accordingly.

Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

The main enticements of currency dealing to private investors and attractions for short-term Forex trading are:

  • 24-hour trading, 5 days a week with non-stop access to global Forex dealers.
  • An enormous liquid market making it easy to trade most currencies.
  • Volatile markets offering profit opportunities.
  • Standard instruments for controlling risk exposure.
  • The ability to profit in rising or falling markets.
  • Leveraged trading with low margin requirements.
  • Many options for zero commission trading.

To know if you made a good investment in Forex trading, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a “risk-free” investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.

When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.

However, it is estimated that anywhere from 70%-90% of the Forex market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.

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7 thoughts on “How does forex trading work?

  1. AvatarVijay Das

    I heard that its illegal for indians to do forex trading. If I am wrong then Whats the way to do forex trading. Please give some more information on this.

    Reply
  2. AvatarJulian George

    Truly playing with money in various currency forms. Not without risks but just as good for gains too. Never stagnant unlike equity which might prove disappointing when we expect life in the markets. Just remember, it will always help to not feel greedy for money.

    Reply
  3. AvatarMahesh

    who are the forex traders in banglore (reputed) who will work and guide an individual in forex trading.

    Reply
  4. AvatarVenkat Desikan

    Yes. I was told by many financial wizards that Forex trading is lucrative but carries some risk too. Let somebody throw more light on that and demonstrate a few instances in a comprehensive manner. After all it is one's irrestible temptation to make big money quickly and within the legally-permissible parameters.

    Reply
  5. AvatarG.V.BABU

    how do we price the currency , is it only by demand and supply or is there any fundamentals in pricing , when INDIA was called a developing the $ was quoting around 27 – 33 rupees now when it is called INDIA IS SHINING ,DEVELOPED the $ is now quoting around 52-54 rupees by 3 months we have lost the value of the rupee by 20% it was trading around 43-45 now $ is traded as a commodity like demand and supply . So do we really know the REAL value of the $. when USA was in a financial mess and the world over the $ was falling but even at that time in india the $ was climbing, now when EUROPEAN countries are in trouble , we in india we are loosing the value of our rupee. So I want to know the real value of the rupee.

    Reply
  6. Avatartrailing stop

    I got what you intend, thankyou for putting up.Woh I am thankful to find this website through google. “Don’t be afraid of opposition. Remember, a kite rises against not with the wind.” by Hamilton Mabie.

    Reply
    1. AvatarTeam BankBazaar

      Hi there,

      Appreciate your feedback. Have a nice day!

      Cheers,
      Team BankBazaar

      Reply

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