What Is a Forex Trade?

Let me explain to you briefly, what Forex Trading in the 21st century is all about: As the internet has weaved its webs all over the world and offers a fast and secure data connection from any financial centre to another, the financial market today is processed more than 98% electronically. Everyone can participate in the fastest growing financial market of the world, currently having a daily turnover of around 5,000,000,000,000$ (5.0 Trillion US Dollars).

A TRADE

What the Online Forex Platforms offer is the possibility to buy and sell Forex Options. A Foreign Exchange Option is a derivative where the owner has the right, but not the obligation, to perform a given currency change. That means that the holder of a position (the trader) can decide whether to keep holding it or to close it at any given moment. The money will of course be of virtual kind by that time, as it sometimes happens, that hundreds of billions of dollars are being traded within few minutes and it is practically and technically impossible to perform such transfers for real, as many times more money is turned over than actually exists on a certain market. Once the trader decides to close a position that gained in value, the value is added to the account balance, which will, in most cases, be in US$ as the main base currency for any traded currency pair. The trader is then able to cash out the balance to a bank account and the book money turns REAL again.

CURRENCY PAIRS

A certain currency pair can be either bought or sold - making the trader speculate on the rate going either UP or DOWN. The first currency of the traded pair expresses the one to be exchanged for the base currency, which is the second one. E.g. if you decide to BUY a EUR/USD position you give USD in exchange for EUR.

SPREAD The Forex Rates for the different pairs are updated real time and so changes can take place quickly. As you will notice when you start to Trade Forex, there is a difference between the BUY and SELL rate of a pair. The price to buy will always be a bit higher than the payoff for selling. This difference gives the financial centres and companies a bit of security and covers processing cost. It is referred to as Spread. The spread for EUR/USD usually lies at around 3 PIP. That means if you can sell EUR/USD for a price (BID) of 1.4450 you will need to pay 1.4453 to buy it (ASK). One PIP (Percent in points) is referred to as a percent of a percent of a certain currency unit. E.g. if Euro is worth 1.456789 US Dollars, the figure 7 expresses 1 PIP of value. We will usually measure any changes in Forex Rates in PIP, as it is a convenient unit in regard to average market movements.

STOP LOSS and TAKE PROFIT

How does leverage work in forex? Imagine yourself having opened a buy position with 1000$ and a leverage of 400. You only have 2000$ in your account before the trade and adverse to your expectation, the market drops 1%. Due to the leverage that -1% turns into a juicy -400% leaving you with a total loss of 4000$. Y our balance is 2000$ negative if you close the position. - WHAT?? THAT RISK IS VAST!! - Right... and that's why trading platforms have integrated the so called Stop Loss feature. Trades will automatically be closed, once the stop loss mark is reached. The mark is usually set at -100% of the trade amount but can be set lower and higher, not exceeding the account balance. As a counterpart there exists a Take Profit feature, enabling the trader to automatically close a position once it reaches a certain profit mark. This can be useful if you think that a marked will stop going up, once it reaches a milestone rate like e.g. 1.4500 due to psychological or political reasons.