Forex: Forex Trading
Forex trading refers to the buying and selling of currencies to take advantage of the price movements and volatility of the forex market.
Forex trading in Detail
The forex market is very dynamic and fast-paced with lots of transactions every day. Traditionally, the forex market was used by central banks, commercial banks, large companies, and other such institutional players. However, thanks to the advancement of technology, now even individuals can actively trade in the forex market and benefit from the price movements.
Example 1: Forex traders aim to buy a currency pair at a lower price and sell it at a higher price. So, a forex trader may buy a EUR-USD currency pair for 1.2364. If the price of this pair goes up to say 1.3024, the trader will sell it off for a profit.
Forex trading in Action
Trading in the forex market is always done in pairs in which one currency serves as the money and the other currency serves as a commodity. So in the currency pair USD-GBP, GBP is the money, and USD is the commodity. Just like you pay 1 GBP to buy a 2 litre bottle of Pepsi, you can buy 1 USD for GBP 0.628 (as of November 2014).
Most traded currency pairs
While you can buy and sell any currency in the forex market, trading is usually dominated by a few currency pairs.
- EUR/USD (Euro and US Dollar)
- USD/JPY (US Dollar and Japanese Yen)
- GBP/USD (British Pound and US Dollar)
- USD/CAD (US Dollar and Canadian Dollar)
- USD/CHF (US Dollar and Swiss Franc)
- AUD/USD (Australian Dollar)
As the volumes are concentrated around a few currency pairs, forex trading is much easier as opposed to say equities. Because in equities, you have to track the movements of many stocks. Whereas in forex trading, you just need to focus on the prices of the most-traded currency pairs.
Risks involved in Forex trading
Like all financial markets such as equity, commodities or futures, forex trading also involves risk. Forex trading is riskier especially because of the high amount of leverage provided by brokers. Using leverage, investors can buy up to 100 times their original investment. If things go wrong, this can lead to huge losses to forex traders.
Before starting, investors should carefully understand the risks of forex trading.
If you are an active forex trader, a student reviewing forex or simply interested in forex, try out our Forex margin calculator.
Forex: Supporting guides and articles
Use our Multi-Currency Forex Margin Calculator which is updated daily to calculate the best forex rate and manipulate forex margin ratio metrics for bespoke Forex Investment results. A popular and powerful free Forex tool.
- Forex Exchange Rate: Exchange rate is the price of one currency in another currency. Exchange rate is also known as the rate of exchange
- Forex Currency Pair: When you deal in the forex market, you deal in currency pairs. You cannot buy an individual currency. Instead you buy units of currency pairs.
- Forex Leverage: Forex leverage refers to investing in the forex market on a credit basis or by using debt.
- Forex Market: Forex or the foreign exchange market is used by people for buying and selling of currencies. The forex market is also known as the currency market.
- Forex Trading: Forex trading refers to the buying and selling of currencies to take advantage of the price movements and volatility of the forex market.
- Forex Margin Call: Margin call is a call from your forex broker when your account balance goes below the maintenance margin.
- Forex Margin Ratio: Forex Trading: Margin ratio is used for expressing the forex leverage in a ratio format.
- Forex Margin Used: Margin used indicates the amount you have actually used in a Forex trade, excluding any leverage.
- Forex Maintenance Margin: Maintenance margin refers to the minimum amount you need to maintain in your forex trading account.
- Forex: Price Interest Points (PIPs): PIPs or Price Interest Points are commonly used by forex traders to indicate profits or losses.
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