Forex Trading Course - Part 1.3

How Forex Trading Works

The first thing you need to know is how does trading forex actually work. Like in any market, the idea with forex is to either buy a currency pair at a low price and sell it at a higher price or sell it a currency pair at a high price and buy it at a lower price. Yes, you can trade and make money both ways!

Take a look at the example below of what a buy trade might look like!

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There are many different ways to trade forex such as spot trading, CFDs (Contract For Difference), options, futures, spread betting, etc.

Spot trading is very simply exchanging physical cash from one currency to another for instant delivery. 

CFDs are used to speculate on forex, stocks, commodities, indices, etc. A CFD is a derivative which means you don't actually own the asset that you are buying/selling. You essentially open a contract at the current price, close the contract at a future price with no fixed time limit and then either make a profit or loss depending on the difference in price. CFDs are what we use! An advantage of trading CFDs is that you are able to use leverage to trade. Don't worry if that doesn't make sense at the moment, it will soon!

Options trading is a different form of trading where, simply put, you are betting on the the direction of price in the underlying asset over a fixed time frame. You can buy a call option, in which you are hoping for price to increase. Alternatively there are put options, in which you are hoping for price to decrease. When you enter, the price gets fixed for you over a selected period of time e.g. 6 weeks. At the end of that period of time, you then sell at whatever the price is on the expiration date and either profit or loss from the difference.

Spread betting is another financial derivative that allows you to speculate on the price of an asset. With spread betting, you pay a commission in the form of the 'spread' and can buy or sell the asset class. You pick a timeframe (like in options) but can close the position early if you want to. You can also use leverage when spread betting, meaning there is a bigger potential for profits... and losses!

I'm not going to go into detail on any other types of trading as I think it is irrelevant.

Here is a very basic example of how forex trading works...

1) You open an account with a broker (don't do this yet!)

2) Download their trading software - most likely Metatrader 4 or Metatrader 5

3) Choose buy or sell on a currency pair, the screenshot below shows EURUSD

4) Close the position you opened when price has (hopefully) gone your way and take your profit

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