what is forex trading

What is Forex trading and how does it work?

Before you need to know what is Forex Trading and how does it work, let’s first define what is Forex.

What is Forex?

Forex is the shortened word for the two words “Foreign Exchange”. The word “For” is the shortened word for the word “Foreign“. The word “Ex” is the shortened word for the word “Exchange“.

Combined the two shortened words “For” and ‘Ex“, you get the word “ForEx“. So instead of saying the words “Foreign Exchange”, we can simply call it “Forex”.

Now that you know how the word Forex came to be, we can now define what is Forex Trading.

What is Forex trading and how does it work?

Forex Trading simply is the buying and selling of Currencies. When buying and selling Currencies, you always deal with two currencies to facilitate trading. This means, for you to buy one currency, somebody has to sell the other.

That’s why it’s called Forex trading because you need to exchange one currency over the other.

So to profit from Forex trading, you first need to know the spot price (exchange rate) of the two currencies. Then you predict the exchange rate movement. And you will profit for the exchange rate difference if your predictions are correct.

For example. Let’s say, you want to trade the EURO dollar against the US Dollar. You need to first check for the SPOT PRICE (the exchange rate) of the EURO Dollar against the US Dollar.

If you believe that the exchange rate of EURUSD will go up and you BUY EURO at the SPOT PRICE of 1.50 in the US Dollar. Then if it GOES UP up to 1.80 at a future date, you will PROFIT 3,000 POINTS which the difference of 1.80 minus 1.50.

Same thing if you think that the exchange rate of EURUSD will go down and you SELL the EURO against the US Dollar at the SPOT PRICE of 1.50 and it GOES DOWN to 1.10 at a later date, you will PROFIT 4,000 POINTS which the difference of 1.50 minus 1.10.  It’s that simple!

And depending on the number of currency units you bought or sell which is determine in trade size or volume, that is the total amount you profited or loss.

In our example above, if you profited 3,000 points and your trading size or volume is 1,000 Units (that is you bought or sold 1,000 units of Euros for the price of US dollar), and your account leverage is 1:500, you actually profited $300 USD!

Another example is if you bought or sold 10,000 units of Euros for the price of US dollar at the same account leverage of 1:500 and you gained 4,000 points, you actually profited $4,000 USD!

So as you can see, the actual profit or loss differs greatly depending on the leverage of your account and the trade size or volume you used to buy or sell.

Do note that trading comes with risks so before you dive into the world of Forex trading, make sure that you read our warning first.

How much money do you need to start trading forex?

You need a minimum of $100 USD to start trading Forex. Yes, I heard you! many brokers out there offering minimum deposit to as low as $1. Some even give a bonus and other perks just to entice you to trade with them. DO NOT BITE THESE MARKETING hypes!

Those Brokers who offer bonuses and other perks are usually scams. Legit and reputable Brokers DO NOT OFFER BONUSES. So if you happen to be in a Forex Broker that offers “Deposit Bonuses” and “Contests”, I suggest you ran away as quickly as you can because your money is at risk with that broker!

How do I start trading forex?

To start trading Forex, you need a Forex Broker. So you first need to sign up with a reputable and trusty broker.

I have to emphasize the words ‘Reputable” and ‘Trusty” because, once you sign up with the broker, you will deposit your money into your “Brokerage Account”.

So basically, your money is with that broker. If your broker is not “Reputable”, then if that broker disappear, your money will also disappear!

A reputable broker is one that is regulated by certain jurisdictions like in Europe, Cyprus, Bahamas and in select parts of the globe. Also a reputable broker is one that is in the business for quite a long time.

Since Forex trading gains public awareness somewhere in the middle of the year 2000, so a forex broker established roughly around 2006 and is still around up to this present day is usually a very good indication of being a reputable and trustworthy.

Once you sign up and have logged in to your Brokers Account portal. In there, you can deposit money to fund your trading account.

Once you have money in your trading account, you can start trading using your Broker’s trading platform. Most reputable brokers offer many trading platforms to support your trading lifestyle.

You can trade using Desktop Computer, or you can trade using the Web-Based trading platform or you can even trade using the mobile trading platform or trading app. You can download and install various trading platforms that your broker supports inside your Brokers Account portal.

So all you need to do is download the trading platform of your choice and log in your trading credentials. You trading credentials, usually your trading account login, password and the trading server you need to log in.

If you don’t know your trading credentials, check your email. Usually, when you sign up with the broker,  they will email all the necessary information you need to start trading. That includes your trading credentials and link to download the trading platform and some other welcoming words 🙂

Can you get rich by trading forex?

Technically, Yes! you can get rich trading Forex. But in truth, it all depends on your trading skills and experience.

If you are just starting out, you will not make money at first because as a beginner, it’s normal to have many losing trades.

And “losing” is part of forex trading so if you are new to trading, you cannot help but have many losing trades due to lack of timing and discipline.

And if you are not that careful in your trading, you can lose all of your invested capital no matter how small or big it is! so be very careful.

REMEMBER THIS ALWAYS: Getting rich trading forex is not about how many winning trades you made. Getting rich trading forex is all about managing your losing trades! This is how Professional Trading is all about.

So here’s a tip if you want to make money trading forex… Do not count your winning trades. Instead, manage your losing trades because if you can manage your loses, you can make money in the long run even though you make many losing trades.

The keys to getting rich in trading forex are the following:

  • Right Education
    • By Right Education I mean, you need to know very well how trading works. Things like how to buy or sell, how to use your trading platform. How margin and leverage works. the effect of having higher leverage and volume to your trades. how the market works and everything else that is to know about forex trading in general.
  • Profitable Trading Strategy
    • By Profitable Trading Strategy I mean, you need to have a trading system that makes money in general. While there’s no trading system that can give you a 100% guarantee that you will win in every trades you make, At Least you need a trading system that has a higher chance of winning. A trading system with a 60%+ win rate or more combined with risk management is usually a good and profitable strategy to have if you can get one. (or if you can develop one through practice and experience)
  • Strict Money Management Rule (Risk Management)
    • By Strict Money Management Rule I mean, you need to be mindful of your risks. everytime you trade, you risk some money to make sure that you risk only money you can afford to lose and that you size your positions properly.
  • Trading Psychology
    • By Trading Psychology I mean, you need to accept that in forex trading, losing is a very big part of the game. You need to condition your mind that this whole forex trading is all about “Speculating the Forex Market” and there is no 100% guarantee of making money. So if your mind is not ready to lose money, then stay away from forex trading.

So now that you have an idea what is Forex trading and how does it work, I suggest you open a free account and start demo trading!

MagForex has been actively trading currencies since 2008 and up until today, he is still very passionate about it.