The following is a guest post by Sam Rogers.
You may have heard of Forex trading, but haven’t really figured out what it is. Well, it is the trading of currencies (why don’t they just call it currency trading?) on the Foreign Exchange market. If that is something that you have been considering, the Forex is for you, but you should be aware of how it works before getting started.
First, you need to find a broker that trades on the Foreign Exchange market. There are many out there, but you should seek a reputable broker such as CMC Forex Trading to minimize counter-party risks when trading.
Second, you need to understand how the market operates, as it is very different that the traditional stock market. When trading currencies, you actually trade currency pairs – one currency against another.
So, if you are interested in trading the Euro against the dollar, you will see something like this: EUR/USD – 1.3000. This means that 1 Euro is equal to $1.30 USD.
If the quote was to increase to 1.3010, the Euro has increased in value to the US Dollar, as it costs more dollars to buy 1 Euro.
Over 80% of all currency trades involve the US Dollar, however, you can trade pairs specifically between two other currencies as well.
It is important to note the risks involved in currency trading. First, almost all currency trading involves leverage and margin – a combination that can create serious losses for the unseasoned trader. It is essential that you fully understand the loss potential of any position, and plan accordingly with stop-loss orders or other hedging plans.
Forex trading also usually involves automatic margin calls, so if your margin level is exceeded, your brokerage will automatically close your position to cover the margin call. Since Forex trades 24 hours, it is common that you go to bed with a gain, and wake up to see your position closed out due to a margin call.
Make sure that you fully understand the risks involved before you get started. You can learn more about Forex Trading Basics in the previous post.
photo credit: flickr – epSos.de