The Basics Of Forex Trading

First off, lets start with The basics of Forex trading. What really is this Forex trading which investors get excited about? It is nothing but trading of currencies. Suppose, your friend is going on a business trip to London for a couple of days. Obviously, he will require Great Britain pounds for this. So he has to go and buy them from somewhere.

You realize that you have some Pounds left over from your previous business trip to London and so you offer to sell them to him. He will obviously pay you back in Dollars because living in the U.S. thats the only kind of currency; you would be interested in, right? Well, so in effect, your friend has just bought British currency from you and therefore you, have just undertaken a Forex trading transaction!

But hang on, where is the return on investment here? Where is the profit? It isnt there, right? Okay, so how does one make a profit with Forex trading. Lets say you give your friend money say about three thousand pounds which you have saved up somewhere for some reason. And you dont ask him for any money in return, not immediately anyway.

What you do is, you tell your friend that when he comes back he has got to return the three thousand pounds to you in the same currency. Your friend spends a week in the U.K and comes back; to find that the exchange rates for pounds has risen! And now this means that the pound has actually become more expensive in the U.S.! Your friend will actually have to pay you back more money than you loaned him because he has to pay more for each pound! And there us your profit from your Forex transaction!

Modern Trading Practices

Nowadays Forex trading is much more sophisticated, but the principle remains the same. You need to get hold of a broker or someone who is a market trader. You choose whatever currency pair you want to deal in and then trade accordingly. Orders are placed everyday through just a click or two of the mouse.

This order is then passed on by the broker to a partner at the Interbank market - where all the trading takes place- so as to fill in your position. Then when you are done for the day, the broker credits the amount you have gained or lost in trade to your bank account. Oh and did I mention that this entire process of transaction can happen in just a matter of minutes? Thats the magic of Forex trading for you!