Online Forex Trading

While the foreign-exchange market may sound alien to some, it is one market that is probably the least complicated. Unfortunately, though, where the stock and bond funds have their own set of terminology, forex traders need to relearn most everything, as the markets are entirely different.

How Online Forex Trading Works
At the most basic level, the goal of any forex trader is to swap currencies for one another to take advantage of the changes in foreign-exchange rates between each individual currency. As an example, think about making a trade through a bank. You walk into the bank, and hand over $15, and in exchange, the teller hands you 10 Euros.

These 10 Euros, though not really worth that much in the grand scheme of things, are rising and falling in value against the dollar by the minute. However, seeing as you’ve made a long-term investment, you exit the bank with your ten Euros and head home. Fast forward several weeks and you see that the Euro has risen in value against the Dollar, and you’re ready to cash-in. You drive to the bank with the Euros in hand and give them back to the teller, asking for dollars in return. After the exchange is complete, you get back $18, $3 more than your original investment since the Euro had risen from 1.5 against the US dollar to 1.8 dollars to the Euro.

Online forex trading works very much like the example above as investors move their assets between one currency to another, hoping to make a profit as the rates shift. However, unlike the bank example above, there is a very important element in forex trading that makes it so lucrative: leverage.

You see, in the bank example you purchased Euros with all the money you had available at the time. However, through a trading account, most investors never, ever buy or sell currency with only the amount of cash they have at that time. Instead, investors may choose to buy or sell currencies with leverage, which essentially means borrowing money to buy more money.

Now imagine the same banking scenario, but this time you walk in and put $15 against a loan for $1,500. Then you use the $1,500 to buy 100 times more currency, and wait again for the Euro to rise to 1.8 before selling your 1000 Euros back for $1,800. You pay off the $1,500 loan, and have in your possession your original investment of $15 for the loan, but also your return on the change in exchange rates equal to $300 less any interest paid.

Making Money with Money
The foreign-exchange markets allow investors to use leverage up to 50:1 on the major pairs, and 30:1 on the exotic pairs, thus providing for investors to make 50% returns on only a modest 1% change in currency values. As you’re probably well aware, a 1% change, though not a daily happening, is a very routine possibility, and it is the reason that so many people make or lose so much money in the foreign exchange markets.

To get started, investors don’t need to visit a bank, nor do they need to fill out applications to buy a loan. Instead, the example above included actions that are part of the market itself, and investors don’t even need to leave their home to start trading the foreign exchange market! When opening an account, select from several different leverage amounts up to 50:1, and fund your account. From there, each and every trade you make will automatically be leveraged at 50:1.

At 50:1, investors would be wise to put an initial investment of at least $1,000, as each short-USD trade will require only $200 from your account, while another $9800 (50:1 leverage) is borrowed by the broker to complete your trade. However, unlike other markets where investors chance a risk of losing more than they invest, the foreign exchange markets are crafted so that investors are automatically closed out of a position before hitting zero, making leverage a tool, not something to be feared.

Demo First
Most profitably investors would attest that trading a demo account is what helped them learn the market, and trade profitably with real money later down the road. Demo accounts, offered by virtually every legitimate foreign exchange broker, allow investors to practice with fake money before graduating to a real money account.

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