Forex Trading is the exchange of currency to make a profit. The Forex market is an over the counter or decentralized market for the international trading of particular currencies. This market decides global exchange rates for each currency traded.
For example, a trade is made in EUR/USD. A trader may buy Euros with the intention to sell them back when the EUR/USD pair falls. This may be an investment opportunity. It involves all aspects of purchasing, selling, and trading the Euros.
In forex trading, two currencies are always involved. These are the Euro/USD and the US dollar/Euros. The Euro is the common base currency for international trade. On the other hand, the US dollar is the currency used in the internal market.
There are four distinct types of forex trading. These are Long spot, Short term Forex, Open Forex, and Swaps. In long spot transactions, the trader expects to gain money on one transaction but loses money on another. For example, a buy of Euros and a sell of Dollars will result in again for the one who bought the Euros and a loss for the person who bought the Dollars. Similarly, the opposite occurs in short term forex trading.
Open a forex trading is the most popular type as it is free from the commission charged by the brokers. The process is simple. An investor who has put in money to buy Euros will later on-sell them for a profit. A trader can invest in the Euro/USD without any risk.
Another popular type of forex trading is day trading. Day trades are generally made by investors who do not want to lose their money on multiple transactions in the same hour. They set up a limit of the amount they are willing to spend on each trade and stick to that limit. Day trades help to minimize losses and are a great source of income.
Some traders like the concept of leverage. With leverage, the trader has more opportunities to earn profits and take risks. Leverage can be used to bet on the trend of a particular currency pair. Although the returns may be high on a long-term basis, they are lower when dealing with smaller trades.
Spot forex trading is the term used for buying and selling the spot market. You will find that this type of forex trading is the most popular among U.S. traders. Spot deals are usually made on the spot market. You can buy or sell currencies based on the current spot price. When you travel abroad to make your investment, you pay the difference in the currency conversion.
When you travel to Tokyo and decide to buy Euros because you heard that they are cheaper than the British pound, you are using one currency pair – the EUR/GBP. The value of this currency pair changes depending on the position that you are taking. Traveling to Tokyo and back would result in you making Euros from one currency pair and spending it on another currency pair. The trader makes his profit when he buys currencies that have higher exchange rates. The trader makes his loss when he sells a currency pair that has low exchange rates. Traveling abroad to make money is exciting, but you must be careful.