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How Does Forex Trading Work?


Forex trading is the activity of profiting from fluctuations in value of one currency against the other. This doesn’t mean you physically buy a currency then keep it at home waiting for the price to increase before you sell it again.

Forex trading has been made a possible activity through high speed internet connections and the facilitation of spread betting platforms. In a sense you are betting through the spread betting platform that a currency will either increase or decrease in value against another currency.

It is no longer the playground for the large financial corporation’s in fact sole traders are quietly taking thousands out of the market on a daily basis. The forex market is always traded in set currency pairs, for example, the EUR/USD (Euro V’s US Dollar). It is the first currency in the pair that has a static value of 1 in this case 1 Euro. The second currency in the pair is the fluctuating currency.

To best explain how currency trading works the below example has been illustrated; if the Euro stood at a price of 1.3300 this would show that 1 Euro was worth $ 1.33 US dollars. You will notice that on the forex trading price there are four decimal places, it is the last two decimal’s “pips” as they are known that we are trading.

If you look at the last two decimal places as being a tenth of whichever currency you are trading you will have an idea of how little a currency has to fluctuate to gain profits. In the case of the US Dollar the last two decimal places together are worth no more than a tenth of a cent.

If we where to look at the EUR/USD currency pair again and the price had increased to 1.3310 this would be a rise in value of 10 pips. Although this is insignificant when you round the price up to two decimal places which still stands at $ 1.33, it can mean a significant amount of profit.

These small increases can generate massive profits depending on how much you are willing to risk. If you risked $ 1 per pip and the currency moved 10 pips you would profit $ 10, if you risked $ 10 per pip you would profit $ 100, $ 100 per pip $ 1000 profit. That is an amazing amount of profit for a currency that just moved a tenth of a cent.

The forex market is the largest financial market in the world. An estimated trillion Dollars is traded on the market everyday which makes it the most volatile and unpredictable financial market. The potential returns on your money can well exceed 400% on a regular basis but it is not something you can jump into with no knowledge.

Experienced forex traders don’t just guess at which way a currency pair is going to go, they use technical data to analyse where prices have been before and use this data to predict a return to certain levels in the market.

Forex trading is an exciting way to make money online. but you need to have the right forex trading tools in order to get the job done right.

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