Trading in the foreign exchange market may seem complicated and while it is a little different from trading in other financial markets, you will realize that the basics are the same.
You may have a good idea of what it means when you are investing or speculating in other financial markets. If you purchase the stock of a company that is performing well, you know that you can hold on to the stock and then sell it for a profit.
However, in case of trading in the foreign exchange market, you are always trading on a pair of currencies. That means that you are almost always selling some currency to buy another currency. Where is the speculation or investment in this, you may ask?
It is true that when you trade in the foreign exchange market, you will always be trading a combination of two foreign currencies. You may buy Euros by selling US dollar or buy US dollars by selling Japanese yen. You can trade similarly on any one of the dozens of widely traded pairs of currencies.
In every transaction, you are buying one currency while selling another but you are essentially speculating that the currency you are buying will strengthen in relation to the other and will result in a profit when you perform the reverse transaction.
For example, you may have purchased a certain amount of Euros by selling US dollars. When the Euro strengthens and you carry out the opposite trade, you will be able to buy more US dollars for the same amount of Euros. This is how foreign exchange transactions bring in profit or loss depending on what the exchange rate is.
As we go along, we will understand the details of foreign exchange trading and also some of the strategies that will allow you to invest and speculate wisely. We will begin first by understanding some of the common terms that you will keep hearing in Forex trading. It is essential that you know what they mean and what role they play in Forex trading.