How does the forex trading works

I am going to write about making money in forex in this article. As we know about the forex that it is Foreign exchange in foreign exchange market. It is actually the exchange of currencies.

We actually make money in Forex by buying and selling the currencies. We need to understand about the currency pair first in order to decide which pair we are choosing.

Currency pair is the combination of two currencies like GBPUSD. The first one in the pair is called the base currency and the second one is called counter currency. GBP is the base currency here and USD is the counter currency.

So if the rate of GBPUSD is 1.5, then you can buy one GBP in 1.5 USD.

This is nowhere confusing if you know which currency pair to deal with and what is the pattern in which the rate is fluctuating. If the rate is going up, then you need to deal with that pair.

The important point here is when you are buying a currency pair, you are buying the first one (base currency) and selling the second currency which is counter currency.

In the similar fashion if you are selling a pair, you are selling the first currency and buying the second one in the pair.

We sometimes call buying and selling as going long and going short in trading terms.

We think that we should have a large amount of money to deal in Forex trading. We are totally wrong as we don’t have to be a millionaire to trade inn forex. It is possible with a term in forex trade called leverage or margin.

Leverage or margin is actually a support with which you can buy more currency with the amount you have with you. Suppose you have only $500 and want to buy a currency worth $10000. You only have to invest that $500 of your cash and the broker will add another $9500 to your amount and put you on the position of $10000. This would be a leverage of 20:1 as you have invested only $1 to buy $20.

You would now be thinking of how these brokers will add that extra money without getting charged. I would say that this is of no use for the traders as there are some techniques with which brokers arrange their profits and will not charge you like rollovers and carry interest methods. You can see these methods on any of the forex websites or tutorials.

Now these were some tips so that we can enter into the forex market and start trading. But before that we should know that there are few types of trades or orders.

Market Order: It is the trade in which you directly want to buy or sell position in the current market rate. You just place your order and your order is processed.

Limit order: This type of order is important as you can place your trade with some limitations here. Suppose you want to place a trade when the value reaches some price, you can use this type or order.

Stop-loss order: You can make a trade in a way that if you loosing more that a certain value you will purchase the order back. It prevents your order from getting into more losses.

Trailing stop order: In this type, you can stop the order or buy it back if you are getting losses more than a certain limit but if you are getting profits, then there is no stoppage.

There are even more types of orders or trading in forex but these are the few ones which we generally use in forex market.

For more tips read
http://topicseverywhere.blogspot.com/2012/01/forex-trading.html