Currency Trading explained with an example
Forex is an acronym used for currency trading and foreign exchange transaction. Every country has its own name for the currency which is used as money, for example; in United Kingdom, the currency used is called British pounds, in Switzerland, the currency used is call Swiss francs and so on. Forex trading means to buy sell or exchange a currency with another currency on the basis of the current market price of particular currencies. A perfect example for this would be, if the current market price for Euro/Dollar is 1.0600, then the base currency in this pair is United States dollar, this price quote defines the value of euro i.e. The value of 1 euro is equal to the value of 1.0600 United States dollars. Forex trade takes place through many mediums like banks, currency exchangers and forex brokers.
Forex market now has become very famous because of all the benefits it is providing to the speculative traders. We will go through all the benefits of forex market later on in another lesson.
In speculative market, currencies are traded via various methods, which includes, spot forex trading, forex futures trading, forex options trading, currency etf’s, forex spread betting and forex binary betting. We will go through every type of trading as the lessons progresses.
Currency trading is now typically done online through forex brokers. A lot of individual retail traders or investors trade forex speculating the future price change of the particular currency pair in order to profit from them. For example, a forex trader speculates that the EUR will rise against the USD, so the trader enters “long” by buying EUR/USD currency pair at the current market price and if the trader speculates the rise of USD against the EUR, then he will enter “short” by selling EUR/USD currency pair at the current market price.
Forex Trade example:
Assuming the current market price quote of EUR/USD is
Bid Price – 1.0600:1.0602 – Ask Price
A forex trader speculates that the EUR will rise against USD. Then he would enter long or buy EUR/USD Example: Bought @ 1.0602
Sold @ 1.0702
Profit is 100 pips
A forex trader speculates that the USD will rise against the EUR. Then he would enter “short” or sell EUR/USD Example: Sold @ 1.0600
Bought @ 1.0500
Profit is 100 pips
The same can result into loss
if the price action goes against our entered position.
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