What is FOREX trading and how does it work?

Discussion in 'Articles & Tutorials' started by e-bus.org, Dec 28, 2012.

  1. e-bus.org

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    Dec 28, 2012
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    Have you ever seen banners for FOREX trading while you were surfing the internet? I think everyone sees these kind of advertisements all the time. So what is ” FOREX”? And how does it work?

    FOREX stands for Foreign Exchange, so it’s all about buying and selling currencies online. But how does it make profit in a short time?

    FOREX trading is the fastest way to make money and it’s also a very high risk investment because if you don’t know how to trade safely and smartly you will lose all your money.

    Imagine you would like to buy a new laptop and sell it at a higher price you should then go to a shop and buy the laptop. Let’s say that the laptop cost 1000 $ but you just have 10 $ on your pocket so you will not be able to buy it. You felt upset but the seller said to you: give me that money you have and you can sell the laptop at any price you want and you should then give me 990$ later. Sounds great isn’t it? the seller will keep the laptop and you should try to find someone to buy it for a higher price. After while you finally sell it for 1200$ so you go to the main seller and give him 990$ and take the laptop. The result is that you earned 200$.

    You would think it’s easy enough but how about if the laptop price decrease to 995$? in this case you can wait for the price to increase again or you can sell it with this price but you will then lose 5$ and the seller shouldn’t lose anything. If the price continue decreasing and level off at 985$ and you sell the laptop for this price that is mean you lost your money (10$) and the main seller also lost 5$ but as I said above the main seller shouldn’t lose anything.

    For this case, the main seller will ask you to pay 15$ as a deposit. The amount will divided into 2 categories, 10$ is called used margin and 5$ called available margin. So when the price fall to 990$ you will have a choice whether you sell the laptop or wait for the price to increase and it is the same if the price decrease to 986$ because the available margin still covering the loss. However, when the price decrease to 985$ the main seller will ask you to deposit more money or sell the laptop immediately and if you don’t do that the main seller will sell it without your permission.

    This is what’s happening in FOREX, brokers used what is called in investment “Financial Leverage”. By using this, your money will double many times up to 500 times with some brokers (1:500). So if you invest 1000$ in FOREX and buy (EUR/USD) pair ” EUR/USD means to by Euros by pay a certain amount of dollars” and the financial leverage is (1:200) that’s mean you invest 200,000$ because the money will be given to you by broker. So when the currency price rise you will earn a large amount of money that you will never earn if you don’t use the financial leverage and just invest 1000$. However, if the currency price fall you will lose a large amount of money as well because the system will sell the currency automatically if the available margin doesn’t cover the loss. This is the reasons why the brokers always warn of risk investment using financial leverage.

    FOREX trading is not as easy as some brokers will tell you and you have to learn about the technical analysis to make right predictions about currencies prices as in the stock exchange market.

    What makes this market special from stock exchange market is the impact on the prices can be made by the politics and also the trading between countries while in the stock exchange market the impact could be made by major investors. And another special thing is that you can make profit even if the currencies prices will decrease so how that happens?

    If you predict that the currency price will fall you will not buy this currency for sure but you can sell it and buy it again with the lower price to make profit from the difference between the two prices. But how could you sell the currency if you don’t own it? The answer is very easy the broker will lend you that currency to sell it and when the price rise you should buy it again. So in this case the broker will take the same amount that they lend it to you and you earn money. But if your prediction was wrong and the currency price increase so you will buy the currency again with a higher price and you will lose money and if the price continue increasing the system will buy the currency automatically if the available margin doesn’t cover the loss. So it’s the same idea for buying and selling currencies.

    In conclusion, you should never invest in FOREX if you don’t know how to analyse the market or you can find a company to give you an accurate signals. But be careful because there are a lot of fake brokers so you should ask about the broker in the internet first and read what others said about it. And remember, never invest a large amount of money unless you are on a safe side because of the high risk in FOREX.


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