Monday, 7 December 2009

Forex Definition - What is Forex Trading?

Here is a simple forex definition with some example trades.

Forex is basically where buyers and sellers conduct foreign exchange transactions. The Forex market is useful because it helps enable trade and transactions between countries, and it also allows an investment opportunity for investors like me and you. 

Individuals who trade in the Forex market typically look carefully at a country's economic and political situation, as these factors can influence the direction of its currency. One of the main aspects of the Forex market is that the volume of trading is so high, it is estimated that around $4 trillion goes through the Forex market each day. Forex is also known as the foreign exchange market.

Examples of forex trades:

If the investor believes the Canadian dollar will become stronger against the US dollar, he would take a short (sell) position in the USD-CAD currency pair.

Another example, if one was to think the pound is to get stronger against the dollar they would take a long (buy) position in the GBP-USD currency pair.

What one must remember is whenever a trade is placed, you are in a loss whether its a long or short trade until the price you bought it for is met.

GBP-USD : 1.052 / 1.054
If you were to buy this (take a long position) at the price quote above there would be a 2 pip spread which means, until the price goes up 2 pips you are evens. The opposite would be the case if you were to take a short position.

What does it mean: 'long' or 'short' position?

In trading terminology, a long position is one in which a trader buys a currency at one price and his or her goal would be to sell it later at a higher price. In this example, the trader benefits from a rising market. 

A short position is one in which the trader sells a currency in speculation that it will depreciate. In this scenario, he or she benefits from a declining market. 

See our other articles and videos about what forex is.

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