What is FOREX Trading and How Does it Work?

Forex trading is oftentimes mistaken with the stock market which can’t be farther from the truth. Also known as the foreign exchange market, investors buy and sell world currencies to make a profit. Whether you start with a $100 or $10,000, Forex trading can be quite profitable if you pay attention to what’s going on in the world.

Same as how company decisions impact their stock prices, a similar way around with countries. Whenever a country announces investment plans, the value of its currency is likely to rise. Hints like this give a head up to investors that the X currency is going to gain value. Before you get to how you can gain more of your money, there are a couple of terms that you should be aware of.

These are also known as the jargon which every up and coming Forex trader should memorize.

Forex Trading Language

Once you decide the currency that you want to buy, that currency is called quote currency. The currency you hold to buy that currency, on the other hand, is called the base currency. These two make up the most fundamental terms of Forex trading.

Unlike buying stocks, the commissions are way high in Forex trading. For example, while you can sell a stock for 100 and buy it for 101, the broker commissions are much higher. In Forex trading, there isn’t a selling or buying price. Instead, the ask and bid price is going to be used.

To be straightforward, the ask price is what your broker asks you in exchange for buying a quote currency. The bid price is what you’re going to sell the currencies you have.

Given there is always going to be a significant difference between the ask and bid price, the difference is determined by the spread. The spread is the price difference between the ask and bid price offered to you. All and all, knowing these terms when starting Forex trading is going to give you a broader way of understanding the trades.

Technicalities of Forex

Same as any other investment, you should sell what you have in order to make a profit. Assuming you already know a couple of things about the stock market, Forex trading cannot be put in the same category. Keeping your savings in the foreign exchange market is definitely not going to be a safe keep. Especially for Americans.

Therefore, your aim should be buying foreign currencies in exchange for the U.S. dollar and sell when the currency you bought gains more value. To speculate your gains by doing this, pay attention to spread. Any value gain above the current spread is going to be your profit. That’s why most investors simply look at the spread first.

Want to start with Forex trading? Visit our Forex category to see how you can begin trading in the foreign exchange market with as little as $100.