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How do you trade forex?

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Quick Answer

In the forex trade, traders purchase currencies, typically at marginally lower prices and then sell them when their prices rise, explains Jeremy Wagner, Head Forex Trading Instructor at Daily FX. Forex trading is conducted directly over the Internet or indirectly through intermediaries such as brokers, dealers and banks, notes Wikipedia.

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Full Answer

Unlike stock trades, which are conducted through stock exchanges, forex trades are conducted over the counter, explains Wikipedia. Buyers and sellers usually interact directly rather than through intermediaries. Because trading involves the comparison of different currency values, forex is typically quoted in pairs, states Foreign Capital Markets. For instance, a quote such as "USD/AUD at 1.3098" shows the value of one U.S. dollar in Australian dollars.

Trading in a few units of currency is impractical, primarily because margins are usually extremely small. For that reason, trade in forex is conducted in lots. Firms such as FXCM offer lots composed of 1,000 units of currency. To increase profits, traders often borrow additional cash from dealers and brokers, a practice known as leveraging. Leveraging has the potential to increase profits as well as losses, warns Ken Sweet of CNN Money. Forex neophytes should avoid leveraging, or use the practice sparingly, states Sweet. Experienced forex traders typically borrow 20 units of currency for every unit they have.

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