How Does Forex Work – Forex Trading Guide

Before you contact a professional trader and get involved in the world of trading forex, it’s helpful to know a little about how it works.  That’s why Unite has put together this introduction to forex trading: giving you a brief overview of what’s involved. However, do remember that to fully understand how forex works and if it’s right for you, you should seek independent financial advice. Around 85 per cent of people who trade in the forex markets lose money globally – making it absolutely vital to employ the services of a fully regulated, qualified specialist.

Forex trading explained: What is forex trading?

Put simply, forex trading revolves around purchasing a currency and, at the same time, selling another. It works on the premise that as the value of one currency increases, the value of another must drop. So, with this in mind, there is always the potential to make money.

Forex trading explained: The basics

Step one in understanding forex trading is to grasp the idea behind a currency pair. Every time a currency is bought or sold, this will be done within a currency pair.

Each currency is represented using three letters – for example AUD for the Australian Dollar and JPY for the Japanese Yen. The first two letters therefore, represent the country; while the third letter represents the actual currency itself: such as the dollar or yen.

Currencies are always traded as a pair: and the forex pair will be read based on ratios such as mathematical proportions.

Forex trading explained: So how do these currency pairs work?

Let’s use an example to illustrate how currency pairs work.

Let’s say that EUR/USD = 1.35500.

The currency on the left, in this case the Euro, is the base currency. Meanwhile, the US Dollar, on the right, will be known as the quote currency.

According to this particular pair, one euro equates to $1.35500. This means that to receive one euro, a trader would have to pay $1.35500. The idea with forex trading is that when the trader chooses to sell, the exchange rate will reflect the number of units of the quote currency that is needed to achieve the sale of the base currency. So, in other words: he or she will pick up $1.35500 for selling one euro.

Forex trading explained: When to buy with forex trading

The basic theory is that professional traders should open buy positions when they think the base currency’s value is going to increase.

Forex trading explained: When to sell with forex trading

Professional traders should open selling positions when they believe that the value of the base currency is going to fall.

Forex trading explained: When are currencies traded?

Five days a week and 24hrs a day: the forex trading markets are unique as they are constantly in action.

Trading sessions begin, using GMT, at the following times:

– Sydney: 10pm-7am.
– Wellington: 10pm-6am.

– Tokyo: Midnight-9am.
– Hong Kong: 1am-10am.

– New York: 1pm-10pm.
– Chicago: 2pm-11pm.

– London: 8am-5pm.
– Frankfurt: 7am-4pm.

Forex trading explained: It’s all about the margins

– From 10,000-100,000, every forex trade is made using incremental lots for each currency. In each case, a lot represents a bet or position: but does not represent the complete value for a trade. So instead traders should enter a deposit as a percentage of a position: also referred to as the initial margin.

– Initial margins will depend on the broker: typically they range from 1-2.5 per cent. This means that, for example, if a position totalled £20,000 and the initial margin was 1 per cent then it would be necessary to keep £200 in the account at all times.  Depending on the size of the loss, the initial margin could reach 5 to 10 per cent.

– Remember that there is always a risk that traders could lose more than your initial investment whenever you trade using a margin.  When a margin is small, there is more to be lost in the event that the forex market does not favour you.

Forex trading explained: What is spread betting?

Spread betting occurs when traders bet on whether a currency will increase or decrease during a certain period of time. The idea is that bets are placed on how many points the currency will move. So, for example, if a trader placed a £2 bet: and the currency then moved by 14 points, the trader would pick up £28. This is usually seen as a form of gambling.

Forex trading explained: What are CFDs?

Also known as contracts for differences, CFDs represent a way to trade on the movement of a currency.

They are very similar to spread betting in that both will offer pay outs based on differences between starting and end prices. Yet, CFDs are different because professionals can trade the forex currency and don’t have to purchase it: although they do have to pay 10-25 per cent of the currency value that they are trading. It will also be necessary to pay tax on the money made.

Unite is proud to be associated with a professional multi asset and forex trading company based in the heart of London. If you’d like to find out more about their service, then contact us now.

PLEASE NOTE: These guides are meant to offer a general outline of some key forex-related areas. They are not to be constituted as financial advice and the strategies should only be considered by professional traders in selected circumstances. If you are considering entering the forex trading markets, seek independent financial advice first.