August 1, 2014

Forex Trading Explained

The foreign exchange market (FX) is a global phenomenon, outstripping the size of global equity markets in terms of daily turnover. There is always the affinity to make money within the FX market because currencies are valued in relation to one another. Therefore if the value if one currency weakens, then the value of another will get stronger.

Here is a simple example of how Forex Trading works:

  1. You select a currency pair of the GBP and Euro.
  2. It is your belief that the pound will strengthen and rise in value, while the Euro will drop and weaken correspondingly.
  3. Therefore, you buy ‘a GBP/EURO’ bet at £10 per point which is indicates that GBP will perform well against the Euro (notice the word positions of the bet). Your profit will ultimately hinge on the GBP currency strengthening and it is possible to close the position when you wish to. However, should the GBP weaken, then you will lose money.

Unlike the stock market, the FX market operates on 24 hour a day basis. Consideration must also be given to a wealth of factors that can affect the relative strength of currencies such as inflation and government debt.