What is Forex Trading?

If you are wondering what is forex trading, it is essentially the trading of currencies of different countries. Forex stands for foreign exchange, and it works somewhat like the stock market in the sense that you buy low and sell high. But it’s also in many ways different. Here is an example: the currency in many European nations is the Euro (EUR), while in the US it is the dollar (USD). A forex trader may buy Euros while selling USD at the same time, a process known as going long with the EUR/USD, or whatever currency is being traded.

How Foreign Exchange Works

Currency or forex trading is usually done via a market broker. When you trade you have to select a currency pair that you believe will change values, so you make a trade for it. For instance, if you bought 1,000 Euros in January 2014, it will cost you $1,300 USD. Assuming that you held onto your Euros for a year, and by again assuming that time the value of the Euro reached $1,400; if you sell, you will gain a profit of $100.

Currency trades can be made online. These days it just takes a few mouse clicks to place an order, after which your broker will send your order to the appropriate market to set your position. Once your trade is closed, your position is closed and your account will be credited with the profit or loss. This isn’t as complex as it sounds, as the process is now fully automated.

Managing Forex Trades

As you can see, answering the question “what is forextrading” is quite easy, but while the process is simple, you need to approach it with caution and due diligence. Just like the stock market and investing in general, you need to do your homework first. If you want to succeed in currency trading you must rein in your emotions and learn about risk management.

The biggest challenges for new traders is (1) using too much leverage, (2) too nervous about losing money, or both. Before you begin trading, make sure you know your risk appetite and study forex risk management. While everyone can profit from currency trading, you still need to set stop limits so you don’t end up losing money. These measures are very important. 

Getting Started

If you want to go into currency trading, you have to get in touch with a forex broker or trade online. Either way you will need to open an account and fund it. Once your account is ready you have to decide what currency pair to trade. A lot of beginners go with the EUR/USD since it is very liquid and is actively traded. However, you also need to look at the market situation and decide what is best.

Now that you know what is forex trading and have chosen a currency pair, use a chart and start analyzing its prospects. If you expect the currency to fall, you short trade it, and if you think it will go up, you go long, or buy it. Once you have made your decision, you can begin trading and make some serious money.   

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