Currency Forex Trading Explained

Currency forex trading is not a difficult market to understand. In fact, most trading actions occur on the currency markets. An example of forex trading explains how currency trading works.

Trading forex is the purchasing of one currency against another. Currencies are listed as pairs separated with a slash on exchanges. The currency quote follows the pairs also separated by a slash.

Here the euro and dollar are quoted as EUR/USD is 1.0110/1.0116. This means one Euro may be purchased for the USD price for 1.0116. All other currency pairs are quoted in this same way across exchanges.

The trader anticipates the euro to gain strength in the market. The buy is one lot, or 100,000, euros for the price of 1.0116 USD. Therefore, the total purchase amount for the euro is 101,160 USD.

Currency trading only requires a deposit of 1% of the purchase price. In this particular example of $101,160, a trader deposits $1,011.

The euro strengthens over the dollar and the value is 1.0226/1.0232. The total market movement of this currency trade was 16 pips. A pip is a movement and is found by subtracting the two USD prices.

This trade result is .0016 and as 100,000 euros were purchased. This number is multiplied by the .0016 resulting in 16 pips.

How to Claim Profits

For the trader to receive one's profits, the trade must be closed. The only way to close this currency trade is to sell the euro. The euro must be sold since the trader originally purchased the euro.

The trader sells a lot of euros at 1.0232 for total price of 102,320. The profits are the sale price minus the original purchase price. These profits are 102,320 - 101,160 and the trader profited $1160.

If the euro had not strengthened this trade would have been a loss. A losing trade can be demonstrated by this currency scenario.

The EUR/USD is now selling for 1.0080/1.0086 a decline of 30 pips. The trader decides to cut losses by selling the euro for $100,860. This number, minus the original buy price results in a loss of $300.

Stop Losses and Currencies

These examples work just the same for any of the other currency pairs. To minimise losses, stop losses can be used just as in other trading.

Currency markets have strategies which are used to maximise profits. These strategies can be found online or through any reputable firm.

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