How does Forex Trading Work?
The Forex Market has the following operations:
- A Buy or to be “long” in a currency
- A Sell or be “short” in a currency.
As the value or the exchange rate of a currency/asset rises or falls relative to another, this offers buy and sell scenarios for investors.
When to Buy?
An investor will buy an asset(currency) if its devalued (weak) but most importantly, if they feel that it will do better in the future from its current rate. Thus they speculate on an appreciation in value and buy early early when it is still affordable and the asset has a lot of ground to cover.
When to Sell?
An investor will sell an asset(currency) if its overvalued(strong) but most importantly, if they feel that it will poorly in the future from its current rate. They speculate a depreciation in value and sell early enough and get the most from the trade.
Forex Trade Operation.
The mechanics of a trade are identical to those in other markets. In currency transactions however , you are simultaneously long in one currency and short in another since they are traded in pairs. When you are long EUR on the EURUSD pair is the same as saying you are short USD on the same pair.
Open Positions: open positions will fluctuate in accordance with the exchange rate in the market. This positions are active and contribute to your running P/L
Closed Positions: This position are no longer open. They are in the history tab. Their P/L has already been credited or debited in you account.
Pending Positions: This positions are set on the system and will be activated once price activates them. They can be deleted at any time.
Below is a trade Example on EUR/USD.
|Trader’s Action||Euros||US Dollars|
|A trader Buys 10,000 Euros when the EUR/USD rate was 1.09900.||+10,000||-10990|
|Later the trader Sells his 10,000 Euro back into US dollar at the market rate of 1.12200.||-10,000||+11,220|
|In this example, the trader earned a gross profit of $230.||0||+230|