For convenience sake, let’s say that you’re studying the EURO and your trading strategies are telling you that the prices will rise or rally, during a given time frame. You buy the EUR/USD pair or, technically speaking; you will simultaneously buy euros as the base currency and sell dollars.
So, you open up your trading platform, which is usually provided for you free by your online forex broker, and you then see that that the EUR/USD pair’s are trading at EUR/USD: 1.3242/45, for example. It is important to remember that the quote (1.3242) on the left, is the bit or “sell” price, which you obtain, when in USD’s when you sell EUR’s. the quote, on he right (1.3245), is used to obtain the ask or the “buy” price, which is what you have to pay in USD if you buy EUR.
Based on the belief that the market price for the EUR/USD pair will climb, you then enter a “buy position” in the market. Simply put, let’s assume that you’ve bought one lot at 1.3245 and as long as you sell the pair at a higher price; then you’ve made some money.
This seemingly complicated process is handled and calculated for you, via your broker’s software and trading platform. The charts and quotes board software should be in agreement with all currency sides.
Let’s have a look at this type of scenario, involving the USD/JPY currency pair. Remember, selling (“going short”) the currency pair implies selling the first base currency and then buying the second, quote currency. If you believe that the base currency (USD) will go down, relative to the quote (JPY) currency or, equivalently , you believe that the quote (JPY) currency will go up, relative to the (USD) base currency, then you sell or “go short”.
NOTE: while the Profit Calculations, on the Short-sell trade scenario below, may seem somewhat complicated if you’ve never been in the FOREX market before, trust us when we say, “this process is nearly seamless through your broker trade station (software). We’re just showing you this thought-process below so you can SEE how a PROFIT occurs even when. also view Forex Education.
Selling a Currency Pair. The current bid/ask price for USD/JPY is 105.26/105.30, meaning you can buy $1 US for 105.30 Japanese YEN or sell $1 US for 105.26 YEN. Suppose you decide that the US Dollar (USD) is overvalued against the YEN (JPY). To execute this strategy, you would sell Dollars (simultaneously buying YEN), and then wait for the exchange rate to rise.
So you make the trade: selling US $100,000 and purchasing 10,526,000 YEN. (Remember, at 1% margin, your initial margin deposit would be $1,000.). as you expected, USD/JPY falls to 104.26/104.30, meaning you can now buy $1 US for $104.30 Japanese YEN or sell $1 US for 104.26.
Since you’re short dollars (and are long YEN), you must now buy dollars and sell back the YEN to realize any profit. You buy US $100,000 at the current USD/JPY rate of 104.30, and receive 10,430,000 YEN. Since you originally bought(paid for) 10,526,000 YEN, your profit is 96,000 YEN.
To calculate your P&L in terms of US dollars, simply divide 96,000 by the current USD/JPY rate of 104.30. Total profit = US $920.42.
In a nutshell forex trading is really just that – foreign exchange currency trading, which today we know as Forex.
The forex market found popularity in the mid nineties and has gained in sophistication and momentum since then. It has become something of an immeasurable entity, with millions going online to trade on the forex market on an almost daily basis.
As a result, the forex market now trades billions of dollars, pounds, or whatever currency you care to name twenty-four hours a day, and the only time it’s closed is at the weekend.
However, worldwide time differences, mean that the shop, which is forex, is hardly ever closed. Therefore, the forex market is not a fixed, physical, entity.
And here is the difference between online currency trading and a physical trading market place like say, the New York Stock Exchange, The City of London, or the Tokyo Stock Exchange, where the traders are limited to the trading hours of these places.
In contrast, the world of the internet forex trading has no such limitations. The internet market permits one to trade from anywhere there happens to be an Internet connection; be it from home, an Internet cafe, or even from one’s work place, in the office.
There are numerous online currency trading platforms, from which to choose from, and it could be said that each online currency trader, has his/her favourite. For those new to forex trading, however, the choice should be made with care, and it is always advisable to try the various “demo” versions as fully as possible.
It must be said, thought that as well as having the possibility to make and take profit(s) from on-line currency trading, it is also possible to incur losses as well, so be careful and never spend more than you can easily afford to lose.
Internet forex trading is purchasing one currency, for another, with the view of making a profit against the weakness of the currency one’s purchasing.
However, because the market can change within the wink of an eye – one has to have an agile mind, confidence, and to possess awareness of world and up to the minute financial affairs.
The online forex market can and will have sharp reactions to terrorist acts, for example and/or acts of God, for example hurricanes, which could upset crude oil supply and delivery.
And, although the markets now readily adjust to such affairs these days; the sudden drops and spikes, as a result, very often could and do, take one by surprise, nevertheless – even the most experienced of traders.
An average of $1.9 trillion is traded on Forex market daily, thus making it the world’s biggest market, and although anyone can now join in on online currency trading, the biggest players – day in day out, are the banks, which range from commercial to investment institutions as well as, registered, futures commission merchants.