What is Forex Trading?

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(Newswire.net — April 28, 2016) — Trading Forex has become increasingly popular among the amateur traders in the past several years. When trades are initiated, it’s always a bet on one currency’s rise against the other. In that sense, it’s a zero-sum game where one trader wins against the other.

Types of Forex transactions

Much of Forex trading takes place on the “spot.” It means that currencies are bought at the current market price. There are also transactions that take place via futures contracts- derivative instruments that expire in the future.

Moreover, there are options on futures, which give an option to enter a futures contract at a specified price. Option holders can also sell their options without entering into futures contracts.

Finally, there are forward contracts, which have a set future exchange rate. However, these contracts are entered between major banks and other financial institutions. Amateurs don’t participate in these types of transactions.

How to read Forex prices

Currencies trade in pairs. Some of the major pairs are EUR/USD (Euro vs. American Dollar), USD/JPY (American Dollar vs. Japanese Yen), and GBP/USD (British Pound vs. US Dollar).

When it comes to a quote, the first currency in a pair is called “Base” currency and the second “Quote” currency. If, for example, EUR/USD trades at 1.1200, it means that you need to pay $1.12 to buy 1 Euro.

Currency lots

Forex trading takes place in lots. A standard lot represents 100,000 units of base currency, and the mini lot is 10,000 units. There’s also a micro lot, which is 1,000 units, and a nano lot of 100 units. (Nano lots are quite uncommon).

Most new retail traders choose to trade mini and micro lots since standard lots represent rather large sums of money and, as a result, increased risk.

Leverage when trading Forex

Forex brokers offer leverage. Often, it can be as high as 100-1. This means that with as little as $1,000 as much as $100,000 worth of currencies can be bought. But, this is quite risky since only a small change in currency’s price can wipe out account’s equity. New traders are advised to avoid large leverage due to the risks involved.

Trading Forex

There are many online Forex brokers offering their services to the public.  Make sure to choose a broker that offers its clients an advanced charting and order execution system through access to both MT4 and MT5 platforms, in addition to daily Forex reviews and other trading tools. Some of the better brokers also offer client trading signals through Autochartist. These signals enable traders to spot developing trading opportunities.

Trading Forex can be very rewarding. But, it is also a difficult market where amateurs compete against each other as well as other professionals. For success, it is necessary to understand what affects currency prices. Most successful Forex traders have learned both fundamental and technical analyses in order to succeed.