How to Trade Forex

Opportunities in Forex: What's your Opinion?

Just like stocks, you can trade currency based on what you think its value is (or where it's headed). But the big difference with forex is that you can trade up or down just as easily. If you think a currency will increase in value, you can buy it. If you think it will decrease, you can sell it. With a market this large, finding a buyer when you're selling and a seller when you're buying is much easier than in other markets, subject to available liquidity. 

Maybe you hear on the news that China is devaluing its currency to draw more foreign business into its country. If you think that trend will continue, you could make a forex trade by selling the Chinese currency against another currency, say, the US dollar. The more the Chinese currency devalues against the US dollar, the higher your profits. If the Chinese currency increases in value while you have your sell position open, then your losses increase and you'd want to get out of the trade.

Making a Trade: How to Buy and Sell Currency

You have an opinion. Now what? Open your free forex demo platform and trade your opinion.

All forex trades involve two currencies because you're betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair.

Let's say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, if you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.

If the EUR/USD buy price is 0.7065 and the sell price is 0.7060, then the spread is 5 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.

Margin Requirements

What is margin? Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit. Keep in mind that trading on margin can both positively and negatively affect your trading experience as both profits and losses can be dramatically amplified. You can keep track of your Used and Usable margin in the Accounts Window of the Trading Station.