In its most basic form, Forex trading is when you exchange one currency into another often in the hope, that due to one of several reasons, the value of the currency you have purchased will decrease in value and enable you to then buy back your original currency and make a profit.
So for example, one day you could choose to purchase £1000 worth of US Dollars and be given $1700 in exchange for that £1000. Then if the value if the Pound decreases in value against the Dollar over any given time period whilst you are holding those Dollars you will make a profit when you exchange them back.
As an example let’s say Pounds decrease in value to $1.65 to one £1 then by exchanging those 1700 Dollars back into Pounds you will make a £30.30 profit.
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However, in days gone by you had to have the required funds to actually purchase the amount of bank notes required, in our example that being £1000 in the hope the value of the currency you purchased would increase in value, but that has now changed with you being able to utilize one of the many different Forex Brokers online.
What is Forex Trading and how does it Work?
If you are interested in becoming an online Forex Trader then by signing up to and becoming a customer of one of our featured Forex Brokers you are going to be able to trade any two currencies against each other in the hope that you will lock in a profit when the price of your two chosen Currency Pairings appreciate and depreciate against each other in your favour.
However, unlike the usual way that a Forex speculator will be forced to buy one currency and sell another, you do not have to have the funds required to buy vast amounts of currency to trade Forex online.
The reason for this is that when you become an online Forex trader you will be taking advantage of something known as Leverage and this will enable to you deposit into your trading account only a small fraction of the value of any trade you make, and as such can make significantly higher profits with those funds than by risking the true face value of any currency trade you place.
You can do this in one of several different ways. However, the most common way to trade Forex online is by placing something known as a Pip Trade, and this is explained in the section below.
What is a Pip in Forex Trading?
Even though you may be an Australian based online Forex trader, you are able to pair together any two currencies without the need to purchase either US Dollars or Pounds Sterling, if you opt to link these two currencies together and trade them against one another.
If you choose to place a Pip Trade, then you will need to understand what this type of trade actual is! A Pip is the abbreviation of something known as Percentage in Points. When you log into a Forex Brokerage and take a look at their Pip Market options you will notice that each Forex pairing is displayed to five decimal places.
It will be the change in the 4th decimal place that is the Pip, and this is what you will be hoping changes in your favour when placing one of these types of trades online.
You could opt to purchase a GBP/USD Pip Trade and place a trade of £10,000 on which the quoted initial price is £1 = $1.6131. When you place this type of trade you will be given the option of choosing any number of Pips below that current price which will be used as a Stop Level this will be your maximum potential loss on that trade.
You will of course be hoping the US Dollar increases in value and locks in a profit or you, but if it drops in value at the end of the time period allocated to that trade then instead of a profit you make a loss.
Let us say you choose to place a Pip Trade with 50 Pips as your chosen Stop Level, if at the end of the allocated time period for that Pip Trade the actual price of UK GBP to US Dollars becomes $1.6131 or anything higher than that amount you have placed a winning trade and you will have made a profit.
The profit and loss you will make when using Leverage and placing high volume trades is determined by the amount of currency you use as the basis for your trade. Let us say on that above trade of £10,000 the trade closes with the US Dollar moving from its opening figure of £1 = $1.6131 to a closing figure of £1 = $1.6081 then you will have made a loss which works out at £10,000 x 0.0050 (50 Pips) and as such your loss would be just $50 and not the entire £10,000 you used as your trade amount.
This is the main attraction of Forex Trading in this way, for you are never going to have to have funds of £10,000 as in our example to place trades of that amount, and at the end of the day if everything goes wrong with your chosen trade, you are only limited in regards to the amount of loss you will have to endure based on the number of Pips you have chosen as your Stop Level, which will always be a tiny proportion of the £10,000 trade.
Your Forex Trading Questions Answered
Below you will find a range of commonly asked questions novice and first time Forex traders often ask when they first start to utilize an online Forex Brokers. Have a look through this guide as it should enable you to get your head around all of the unique terms and saying often associated with the trading environment.
- What is Forex Rate?
The Forex Rate is the current exchange rate for changing one currency into another currency. When you look at the many different currencies that you can pair up together and trade against the current market value of those two currencies are used to display the Forex Rate, and it is this you will be hoping swings in your favour when placing such a trade online.
In the online Forex trading environment you will discover the each currency pairing with have what is known as a Base Currency which is the currency on the left hand side of the pairing and the other currency located to the right of that currency pairing is known as the Counter Currency.
- What Is Forex Hedging?
One major aspect of online Forex trading is that you are often put in a position where you can actually hedge against making a loss. With many Forex Brokers offering their new and often existing customers a range of offers when they make a deposit, you will find your deposit amounts become a much larger trading budget due to those awarded offers which can be any amount from just 10% or up to and above 100% of your deposited amount.
The art of Forex Hedging is to locate a Forex trade to place but have both sides of the trade covered so irrespective of the way either currency moves, you are guaranteed to have placed a winning trade at the end of the time period allocated to that trade!
Obviously when you are placing a Forex trade with your own trading funds, placing a trade on both possible outcomes of each trade is not going to be financial profitable, much like when you bet on both Red and Black on a Roulette game.
However, as you are using extra funds to place these types of wagers, and not your own funds, then irrespective of the way the trade moves, by betting on both outcomes with those extra funds a guaranteed profit will be yours at the closing of those trades.
So you will often find that most online Forex traders will open up accounts with as many different Forex Brokers as they can find, and will always be very eager to accept any and all offered by those Brokers.
- What is a Forex Trading System?
You are going to find that most experienced Forex traders will have their own unique trading strategies and trading system in place, which they will use regularly in the hope they can lock in lots of winning trades.
The art to using a successful Forex Trading System is have a strategy in place that reduces your risk to the absolute minimum whilst also at the same time having the ability to lock in a guaranteed profit once the currency pairings you are trading against each moves in the way you had predicted.
Mastering Forex trading is never easy, however there are lots of things that can and regularly do see the value of currencies swing in one direction or another, and knowing what to look out for and then acting instantly to place Forex trades when you are aware of one of these situations that will force currencies to move in one way or another is often what makes a trader a very successful one.
- What is a Forex Trading PDF?
You are often going to some across a wide range of Forex trading guides, strategies and even trading platform help files and user manuals which you can download onto your computer and then peruse them at your leisure.
These guides and user manuals are often in something known as a PDF format. This stands for Portable Document Format. A PDF is simply a formatting type which allows a company to present any type of documents in such a way that they are completely independent of the hardware, software or even the operating system attached to a computer or device.
So if you do come across any type of Forex trading document that has been designed using PDF you are going to be able to download it onto any type of device and keep it safely stored on that device and then you will be able to view the contents whenever you are good and ready to.
- What is a Forex Reserve?
All Central Banks will hold something known as a Forex Reserve. This is often a huge stock of different worldwide currencies which they can use and access to back any Government financial liabilities and also those of any Banking institutions that holds funds in that Central Bank.
- What is a Forex Card?
A Forex Card is a pre paid type of debit card that many travel agents and banking institutions will allow anyone to purchase. When you are planning a trip abroad then you may wish to lock in the current value of your home currency into the current exchange rate of the currency of the country you are planning on visiting.
To purchase such a Forex Card you simply hand over the amount of home currency you wish to load onto the card and it will then be exchanged at the spot rate offered by the travel agents or banking institution you are purchasing it from, and that amount will then be the amount of foreign currency you can spend with that card.
So if you are in Australia you will find you can purchase Forex Cards in lots of different currencies, be aware there may be a small nominal one off charge for issuing the debit card which will only be at the most a few Australian Dollars.
Many online Forex traders will keep one of these cards and use them exclusively for keeping their Forex trading funds loaded on the card, as by doing so their trading funds are keep apart from their day to day bank account and they can use the Forex Cards to make deposits and withdrawals to and from their chosen Forex Brokers. One additional benefit is that they can access their funds at any ATM or use the card to purchase anything from a retail outlet that accepts the Debit Card, which are usually Visa and MasterCard’s.