What is Forex Trading

Overview
Forex, FX, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another. speculate on the exchange rate between two currencies. In doing so, speculators purchase or sell one currency for another with the hope of making a profit when the value of the currencies changes in favor of the speculator as a result of events that takes place across the globe. This market of exchange has more daily volume - both buyers and sellers - than any other market in the world. The FX market is available 24-hours a day, five days a week. Furthermore, the Forex Market is the largest financial market in the world with daily reported volume of over $1.4 trillion changing hands between buyers and sellers across the globe, making it one of the most exciting markets for trading. Although currency trading is inherently governmental (central banks) and institutional (commercial and investment banks), technological innovations, like the internet, have made it easy for individuals to take part in the currency trading markets

and to trade via intermediaries online.

How an FX Trade Works
In the FX market you can buy or sell one currency for another. When you buy a currency, you are said to be "long" in that currency and when you sell a currency, you are said to be "short" in that currency. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies in order to make profits - since the objective is to earn a profit from their position. Placing a trade in the foreign exchange market is simple and the mechanics of a trade are virtually identical to those found in other markets. Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of EUR/USD you can close out that position by subsequently going short in one EUR/USD lot (at the prevailing bid price).

Example of How FX Trade Works
Trader's Action
Euros
US Dollars
A trader purchases 10,000 Euros in the beginning of 2001 when the EUR/USD rate was .9600.
+10,000
-9,600
In May of 2003 the trader exchanges his 10,000 Euro back into US dollar at the market rate of 1.1800.
-10,000
+11,800
In this example, the trader earned a gross profit of $2,200.
0
+2,200

Quoting Currency Pairs
Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY EUR/USD you have bought Euros (simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar.
Currency Abbreviations

EUR
Euro
NZD
New Zealand dollar
GBP
Great British pound
AUD
Australian dollar
USD
US dollar
CAD
Canadian dollar
CHF
Swiss franc
JPY
Japanese Yen

EUR/USD
In this example Euro is the base currency and thus the "basis" for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought Euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the Euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold Euros in the expectation that they will depreciate versus the US dollar.
USD/JPY
In this example the US dollar is the base currency and thus the "basis" for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
GBP/USD
In this example the GBP is the base currency and thus the "basis" for the buy/sell. If you think the British economy will continue to be the leading economy among the G8 nations in terms of growth, thus buying the pound, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the Euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.
USD/CHF
In this example the USD is the base currency and thus the "basis" for the buy/sell. If you think the US dollar is undervalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.

Buying / Selling
First, the traders should determine whether they want to buy or sell. If they want to enter a short order - whereby they will profit if the exchange rate falls - they simply need to click on the SELL rate. The opposite holds true for traders who enter buy orders: they can simply click on the BUY rate, and thus will profit if the exchange rate goes up.

Example of How Buying / Selling Works

As with all markets, there are two prices for every currency pair. The difference between these two prices is the spread, or the cost of the trade. In this example, the spread is three pips. On the 10k position, a pip on the EUR/USD currency pair is worth $1.

Margin / Leverage
FX accounts are margined: a trader can hold a market position much larger than the value of the trader's account value. The online trading platform which FOREXYARD offers has margin management capabilities, which allow lenient margin requirement of up to 1/2%. However, we do not recommend using leverage of more than 10 times your account value. Using leverage exaggerates both gains and losses. Even when market conditions are relatively calm, using leverage can generate large gains or losses. In the case where a trader surpasses the maximum leverage allowed (which can happen when account equity shrinks as a result of trading losses), the trading system will close all open positions in the account. This prevents client's accounts from falling into a negative balance, even in a highly volatile, fast moving market.
Example of How Margin Works
Since the trader opened 1 lot of 10k EUR/USD, his margin requirement or Used Margin is $50. Usable Margin is the funds available to open new positions or sustain trading losses. If the equity (the value of his account) falls below 20% of his Used Margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits.

RolloverIn the spot forex market, trades must be settled in two business days. If a trader sells 100,000 Euros on Tuesday, the trader must deliver 100,000 Euros on Thursday, unless the position is rolled over. As a service to our traders, FOREXYARD automatically rolls over all open positions to the next settlement date at 5:00 pm New York time. Rollover involves exchanging the position being held for a position expiring the following settlement date. The positions being exchanged are usually not valued at the same price. The difference in amount varies greatly based on the currency pair, the interest rate differential between the two currencies, and fluctuates day to day with the movement of prices.
For positions open at 5.00 pm EST there is a daily rollover (interest payment) you pay for an open position depending on your established margin level and position in the market. If you do not want to earn or pay interest on your positions, simply make sure they are closed by 5.00 pm EST, the established end of the market day.

Getting Started
With no commitment or cost, you can open a Virtual Trading Account. The account has the full capabilities of a "real" account including live market rates, access to real-time market analysis, and the ability to execute trades off streaming prices. The virtual account (or Demo Account) gives you the ability to learn about the forex markets and test your trading skills without any risk.
How to Trade Your DemoUse this time to make a plan and develop your strategies.
· Choose the right currency pair. Find out based on your risk parameters, which currency is best suited for your trading style. Some may be too volatile and some too slow so decide which currency pair is most appropriate for your strategy and time frame.
· Decide on how long you plan to stay in a trade. If you are an inter-day trader, what is the average time of your trade? - a few minutes, a couple of hours, a full day, or swing trade (couple of days to a week).
· Before you enter a trade you should also have clear exit plan. Place your stops and limits accordingly.
· Know how much you are willing to risk and how much you are looking to gain.
· Keep track of important news and technical levels, which may be tested within your time frame.