How to Trade Forex
Forex is traded in currency pairs; the actual currency being traded is called the base currency and is the currency on the left when looking at a currency pair.
So, for example: EUR/USD – The currency on the left (the Euro) is the base currency in this situation. You can either buy or sell the base currency depending on which way you think the markets will move. The direction of the movement of the base currency will depend on how well it does compared to the other currency in the pair, known as the counter currency (in the above example, therefore, the US Dollar is the counter currency).
Choosing the Right Forex Pair
So, when you trade Forex, you need to keep in mind the movements of both currencies in your chosen pair rather than just the one. For example, the Euro may be doing well, but if the US Dollar is also strong then one might not see a great deal of movement within this particular currency pair. Similarly, if the Euro declines, unless the US Dollar is strengthening significantly one may not see that much movement – movement depends on the relationship between these two currencies rather than the independent action of just the one.
Leverage is available on many different FX pairs – ETX Capital, for example, offers leverage of up to 400:1 on certain Forex pairs.
The leverage available on Forex pairs comes with risk – if you lose, you can end up losing a lot more than you put in. However, if you win, the leverage involved means that your profit will be much larger than it would have been had you entered into the trade without any leverage at all.
As with other forms of trading, with FX you can either buy with the intention of later selling at a higher price, or vice versa.
Forex Trading – An Example
Let us stick with our example of EUR-USD. If I believe that the Euro is going to strengthen relative to the US Dollar, I’ll buy the Euro (simultaneously selling USD) in the hope of selling it once it strengthens (and receiving a greater amount of USD in return) – this is known as ‘Going Long’. However, if I think that the Euro is heading for a fall against the US Dollar, I’ll sell the Euro (thereby buying USD at the same time) with the intention of buying it back in the future for a lower price in USD once the Euro weakens relative to that currency, thereby making a profit. This is known as ‘Going Short’.
And there we have the essentials of trading Forex. For more information on trading techniques, why not check out the Forex Trading Tips page.