Forex trading is the act of buying and selling currencies. Just as you exchange physical money using a forex transaction on an overseas holiday, forex trading involves buying one currency while simultaneously selling another. A key difference is that forex trading is done specifically to try to generate profit from the exchange.
All forex trades involve two currencies. As the prices of currencies fluctuate in the open market, for example, due to supply and demand factors, traders will speculate that the value of one currency will appreciate or depreciate relative to another. If the trader anticipates the market direction correctly, they can make a profit. If not, they will take a loss. Fundamentally, generating a profit by trading FX is as simple as buying low and selling high, or vice versa.
This multi-directional profit-taking is possible because, unlike traditional investing, forex trading does not involve the purchase or ownership of the underlying currencies. Instead, traders only speculate on price changes using a type of derivative called a Contract for Difference (CFD). The major advantage of CFD trading is that traders can potentially generate a profit by speculating on a falling price, unlike stocks or physical assets, where it is only possible to profit if a price increases above the level you paid for it.
Let's look at a simple example to demonstrate how a forex trade works:
Suppose you believe the euro (EUR) will strengthen against the US dollar (USD); in other words, you think the value of the EUR will increase relative to the USD.
You open a trading account online and decide to buy 10,000 units of the EUR/USD currency pair at the current exchange rate of 1.1000. The total size of your CFD trade position will be: 10,000 EUR x 1.1000 = $11,000
Now that your trade is open, let’s say the EUR/USD exchange rate rises to 1.1200 and you decide to close your trade position. At that point, the difference between the opening and closing exchange rates is 0.0200 (1.1200 – 1.1000). You traded 10,000 units, so your profit calculation looks like this: 0.0200 x 10,000 = $200
Because the value of the EUR has gone up, you make a $200 profit.
However, if the exchange rate had moved against your prediction, you would have incurred a loss. For example, if the price of EUR went down from 1.1000 to 1.0900 (a 0.0100 difference), your loss would be calculated as follows: 0.0100 x 10,000 = $100
These examples show the difference that small fluctuations in pricing can make, so when trading forex, it’s important to only risk what you can afford to lose. If you're interested in discovering more, click here -
https://www.copyfx.com/ratings/rating-all/show/316798/tab/profit/period/week/