Forex Currency Trading – Understanding How Forex Trading Works

The foreign exchange or forex market is a large worldwide decentralized or online market for the trading of foreign currencies. This marketplace determines international exchange rates for each currency traded. It includes all facets of purchasing, selling and trading currencies at either current or determined market prices. All transactions are completed instantaneously and electronically through traders, financial institutions and brokers all over the world.

Traders participate in forex trading by purchasing one currency and then selling another simultaneously at the same time. It is important to remember that the value of each currency pair is determined by the amount of money which is being exchanged. Therefore, when you buy a currency, you are purchasing a quantity of currency and in turn it will be converted into cash and then sold. This is the fundamental purpose of trading in this market and why investors make money.

Trading occurs in two types of venues namely, short position and long position trading. A short position is the buying and selling of a foreign currency during its initial days. During a short position, the trader hopes that the price of the currency pair will rise above the opening price.

If and when the opening price is broken, the profit is maximized. Conversely, when the price is closed, the trader hopes that it will fall below the closing price. There are numerous currencies in the forex market. These include the major currencies including the US dollar, the Euro, Japanese yen, Swiss franc, Australian dollar, Canadian dollar, Swiss mark, New Zealand dollar and the Australian dollar. Basically, any currency can be traded in the forex market but typically, the most commonly traded currency pairs are those listed above.

There are different ways to trade currencies in the forex market. Forex traders can buy or sell currency pairs just like stock traders buy and sell stocks. A trend line is usually drawn that shows the high and low points for a particular currency over a given period of time. Another trading system is the simple moving average function. This system follows an arithmetic series that continuously monitors the movement of prices of currencies over a specified period of time. This type of trading is widely used in the financial world to facilitate trading among financial institutions.

It is important for traders to understand how to read the charts, particularly when dealing with foreign exchange currency. Although pip is a term not related to price, traders should not rely solely on the pip value alone. They should also learn how to interpret the other data provided by the Forex market such as the trends, gaps and crosses that indicate possible future movements.