Trading currencies – in short: Forex Trading – becomes more and more popular. Especially retail investors started to buy and sell currencies instead of stocks. Compared to stocks or funds, FX trading offers more opportunities to make huge profits, but there’s also more risk involved. It’s also possible to lose every single dollar in your trading account.
There’s no market that is as liquid as the Forex market. Currencies are bought and sold every second. Online trading platforms are able to trade automatically and to follow algorithms that were developed by humans. Forex trading is very easy nowadays. Forex brokers provide good platforms that are easy to use for everyone.
The birth of the Forex market goes back to the Seventies when countries decided that currency exchange rates should be variable and not fixed any more (floating). Since then, the exchange rates are determined by supply and demand. When lots of people want to own US-$, the demand for Dollars will rise and the exchange rate to other currencies like Euro is increasing. When you bet on an increasing $ exchange rate, you will make money in this case. And due to the fact that you can trade with leverage it is possible to make a lot of money with relatively low investments. A leverage of 1:200 is pretty much standard. If you bet 500 Euro it is possible to have control over 100.000 Euro. In case one exchange rate climbs 1 % – you will earn 1000 Euro – only with 500 Euro at stake. To avoid high losses, the position will be liquidated as soon as the exchange rate is decreasing by 0.5 %. So you can only lose 500 Euro but you have the chance to earn multiple times your initial investment.
You can trade 24 hours a day and five days a week. When you’re trading Forex you always sell or buy two currencies – a pair of currencies. In case you want to trade with US$ and Euro you can bet on a rising Euro compared to US$ or a falling Euro.
The most important currencies and their acronyms are:
- United States Dollar (USD, $)
- Euro (EUR, €)
- Japanese Yen (JPY, ¥)
- British Pound (GBP, £)
- Swiss Franc (CHF)
It’s important to distinguish between bid and ask prices.
- Bid price is an expression for the amount a trader is willing to pay for a currency
- Ask is an expression for the amount a trader is willing to sell a currency
When you’re trading Forex online you don’t pay any commission. Now you might ask how a Forex broker can make money. He earns money with the difference of bid and ask (also called spread). This spread is expressed in “Pips”.
For example: The exchange rate for EUR/CHF is 1.3154 – 1.3157. This means that there’s a spread of 3 Pips. That is what a broker actually earns when he connects a seller with a buyer. The seller gets 1.3154 CHF for each Euro and the buyer pays 1.3157 CHF for every Euro.
If you want to find the right Forex broker, you should take a look at our Forex broker comparison.