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Saturday 30 July 2011

Foreign Currency Exchange Trading: How Does It Work?

Foreign currency exchange trading is one of the hottest trends in the financial world over the past few years. What E*Trade did for online stock trading, other brokers have done for trading currencies through online brokerages. In fact, with the exception of stock trading, foreign currency exchange trading is the most popular trading field in the world.

Here, we will cover foreign currency exchange trading and explain how it works – from joining a brokerage to opening a trade and executing it and (hopefully) banking a profit. We will also explain various concepts behind foreign currency exchange trading, such as online foreign exchange rates, spreads, and others.

Foreign Currency Exchange Trading: The Role of the Broker

The foreign currency exchange trading market is just like any other financial market. It consists of buyers, sellers, and intermediaries called brokers. A broker is basically an access route to the market, either through the broker directly (if they are a market maker) or via the broker to another, larger market.

The broker, basically, routes your orders to other traders through a variety of methods and helps you conduct your transactions. It is like a real estate agent who deals with other agents and other buyers/sellers when buying a home. The prices are based off of online foreign exchange rates, as described below.

Foreign Currency Exchange Trading: The Principles Behind Trading

In foreign currency exchange trading, you are buying and selling currencies against each other. This is accomplished via currency pairs. One popular pair is EUR/USD. The online foreign exchange rate that comes with this pair tells you the value of euros versus dollars, or, how many dollars you can purchase with one euro.

If the online foreign exchange rate is, say, 1.5, you can buy 1.5 dollars with one euro. When you buy euros at this rate with dollars, you are essentially buying a euro with a “value” of 1.5.

Let’s say that the online foreign exchange rate goes up to 1.6 (which is a huge leap in real life). You will essentially make a profit of 0.1 dollars per euro that you bought. So, if you bought 1,000 euros, then the “value” increases by 0.1 – giving you a profit of 100 units.

Foreign Currency Exchange Trading: Spreads

Many brokers make money through the use of spreads. Every time you place a trade, there is a spread that goes with your online foreign exchange rate. This spread is usually addressed in terms of ‘pips’, which are units worth 1/100th of one percent (or 0.0001). A spread is the difference in your online foreign exchange rate between the bid and the ask price. To keep it simple, the lower the spread the better it is for you, since you can make more money.

Foreign Currency Exchange Trading: Things to Consider

While trading, keep in mind that increments in value are very small. A currency pair could fluctuate only by a few pips during the day. The way people make profit is by using leverage (buying a lot of currency with only a small amount of actual money in your account) to purchase large lots of currencies and taking advantage of fluctuations, sometimes making a dozen or so trades during a day.

The above are basics for foreign currency exchange trading. Pay attention to online foreign exchange rates, spreads from brokers, and financial news from across the globe and learn as much as you can about the business before you begin your trading career.Visit : http://forexnewsnow.com/

2 comments:

Unknown said...

“It is like a real estate agent who deals with other agents and other buyers/sellers when buying a home.”--- Forex brokers have a similar job with a real estate agent, and this is to provide you with information that will guide you to make the right decisions. He will help you to familiarize yourself with all the Forex transactions and will assist you in all trading needs and inquiries that you might have.

Neil Salser

Unknown said...

E-trade is on the boom.Every one wants to earn more and more money and forex is a platform which provides an opportunity to the people to increase their income.
Affiliate program is a good one for this.Very nice information provided by the author with the help of this blog.simply a nice blog.

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