How To Start Forex Trading. If you have ever taken a vacation out of the country, you already have an idea about how Forex trading works. Say you have booked a vacation to Europe and you are based in the United States.
For people looking to learn about Foreign Exchange trades , this transaction can be confusing. One of the easiest ways to understand how Forex trading works is to simply think:.
You are buying selling one currency pair by selling buying it using another currency pair. The means that you can trade anywhere as long as you have a counterparty for the transaction.
The little guy, like you and I, were unable to take advantage of this market on a bigger scale. Ever see the currency kiosks in an airport? That is a currency exchange. Taking our airport kiosk example, say for a moment that there are two kiosks in the same building. Because there is no centralized exchange, each kiosk will have its own rules and prices. One kiosk may give you.
Yes, it pays to shop around. This is where it gets confusing when people learn about Foreign Exchange trades. In the kiosk, anybody can walk up and exchange their currency. The downside is much the same as trading stocks. There is only so much available at a certain price so orders may be filled with slippage. You need someone to buy what you are selling and at times, there is nobody willing to at the current price.
You hand over the money and they give you the corresponding amount. They are the ones that provided liquidity for your trade. What you usually see is this: That is spread cost and that is how they make their money. When you learn about Foreign Exchange trades, you will hear there is no commission. That is true however you do pay a spread cost which is the difference between the bid and ask price. Now imagine you are sitting in front of the computer and you are hooked up via internet to that kiosk.
After you have learn how Forex trading works, you decide to execute a trade using an online forex trading system. You want to buy the Euro with USD and the current price is 1. You place an order and the kiosk instantly does the exchange for you. In reality, you will not trade with a kiosk. You will trade with many of the retail brokers that offer online trading.
Once you learn how Forex trading works, you will want to shop around for your broker. The broker is actually a dealer and they will be the ones on the opposite side of your trade. This means when you buy the Euro as in this example, they bought the USD from you. You must trade at the quoted price that the dealer has made. Yes, the dealer has stated the exchange price! There is more to talk about when learning how Forex trading works.
For example, why dealers hedge their positions and what causes them to widen the spread cost on each trade. Higher spread costs increases your cost on the trade.
It is not needed to profit from Forex and is more of an academic exercise. I have given you the basics of how Forex trading works but you will learn much more by actually getting involved in the markets and that usually starts with finding a trading system that trades Forex.
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