What is Forex Trading?
Forex trading, or FX trading, allows you to simultaneously buy or sell one currency against another across a decentralized, over-the-counter (OTC) global market, without the need to physically deliver the underlying currency.
It is one of the world’s largest and most liquid markets, trading around the clock from Sunday through to Friday, with a daily total average turnover exceeding €4.5 trillion.
One of the key benefits to FX trading is the ability to trade on margin, or leveraged trading, which signifies the ability to open larger trading positions with a relatively small initial deposit. Clients of M4Markets can use leverage that can be as high as 1:500.
How does Forex Trading work?
When trading in foreign currency pairs, traders speculate on whether the value of one currency will rise or fall against another currency, and decide to buy (go long) or sell (go short) accordingly.
Example 1: Buying EUR/USD
The price of the Euro (base currency) against the US Dollar (quote or counter currency) is 1.10429/1.10436.
You decide to buy €10,000 (go long) because you predict that the price of EUR/USD will rise. EUR/USD has a leverage of 1:200 (margin rate 0.5%), meaning that you can open a position worth up to 200 times more than the required deposit for the trade.
The price goes up during the day to 1.10503/1.10510, making your prediction an accurate one. At this point you decide to close your long position by selling at the current sell price of 1.10503, which is a movement 67 points (1.10503 – 1.10436) in your favor. You are left with a profit of $6.7 ((€10,000 x 1.10503) – (€10,000 x 1.10436)).
Example 2: Selling EUR/USD
The price of the Euro against the US Dollar is 1.10479/1.10486.
Recent news of political instability suggests that the price of the Euro will probably fall against that of the US Dollar in the near future, prompting you to sell (go short) €10,000. The EUR/USD leverage remains at 1:200.
The price falls during the day to 1.10453/1.10462, validating your prediction. At this point you decide to close your short position by buying at the current buy price of 1.10462, which has moved 17 points (1.10479 – 1.10462) in your favor. You are left with a profit of $1.7 ((€10,000 x 1.10479) – (€10,000 x 1.10462)).