How does Foreign Exchange (FOREX) Trading works?

How does trading Forex works? Explained:

In this section we will explain you how is it that Forex trading works.

FOREX explained:

If you've ever traveled to a foreign country, you may have needed to exchange your money. If so, you already participated in forex trading.

"Forex" is the short form of FOReign EXchange... Well, forex is a bit more than that.

For example, companies buy goods from other countries. In order to buy them, they need to obtain the local currency first. Just like us, when going on holiday. The difference is that usually, this companies will exchange MASSIVE amounts. When this companies exchange these huge amounts they will actually, move the price of the Exchange Rate. Because the demand for the currency that they need increases.

When the demand increases, the price increases. With all this exchanging going on around the world, the exchange rates constantly move.

This is how it works: when currencies are exchanged they have a certain price, the "Exchange Rate", as in any market. The price of a currency is determined by the law of supply and demand. If there are many people or companies that want to change euros into dollars, the price of the dollar will rise against the euro, and so the exchange rate will change.

Let's use an everyday example to explain how you can actually profit from this.

How to make profit from trading forex:

Say you live in Europe, and went on holiday to the United States. Let's say that you changed your €500 into US Dollars, at the rate of (let's say) 1,40 dollars for every Euro. You got USD700, but you do not spend any money at all, so you still have USD 700 when you come back.

After the exchange rate moved from 1,4 to 1,3, instead of getting €500 back, you actually get €538,5. You have gained €38,5, simply from holding your money in dollars while the exchange rate changed. This is essentially how we trade in the forex market. We buy a certain amount of a currency, hold on to it whilst the exchange rate moves, then change it back, making money along the way.

How to decide when to buy and sell is exactly what we teach throughout the rest of our lessons. As you can imagine, travelling a lot and saving a bit of money on your holiday budget, and then exchanging it it’s not really a practical approach to trading currencies. Fortunately, there is an easier way to do this. You can trade currencies through forex brokers. What this means is that you can exchange currencies online throughout the day and take advantage of the constantly fluctuating exchange rates. Just as in the example of when you went on holiday, you can buy different currencies and make a profit as the exchange rates change.

This is TRADING FOREX. Trading forex online, with a broker has many benefits, you can trade forex from your home or anywhere that you have an internet connection. The forex market never sleeps, it is open 24 hours a day, 5 days a week and so can suit your daily routine. You do not need a huge budget to get started. Here we explain how a forex broker works.

Of course, it will require some learning until you get there, but this is exactly why we are here, to teach you. To help you learn how to trade in a way that can suit your individual lifestyle, and to help you navigate your way through the forex market.

If you would like to know more about Forex Trading, and our products contact us.

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  • Goldman sachs - bank