What is forex trading?

Peter Jones
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Forex is short for foreign exchange. Forex trading therefore is trading in the foreign exchange market. When you trade Forex you’re not trading a single currency, but you are trading a currency pair. A currency pair, as you may have already guessed, consist of two currencies. You may have seen the symbols for these currency pairs displayed in such ways as, EURUSD, EUR-USD, or EUR/USD. The symbol EURUSD is the symbol for the euro US dollar currency pair.

forex trading

With a currency pair symbol EURUSD the first part, EUR is known as the base currency and the last part, USD is known as the counter currency. The price action of a currency pair indicates the relative strength of the base currency in relation to the counter currency. For instance if the price of the EURUSD is 1.5000 and the price goes up to 1.5100 then the euro has increased in relative value compared with the US dollar. If on the other hand the EURUSD is 1.5000 and the price goes to 1.49500 then the US dollar has increased in relative value as compared to the euro.

Now that we’ve covered a bit about currency pairs and their symbols let’s talk more about Forex trading. In general Forex trading is a speculative activity. In other words, traders look to profit by speculating whether a currency pair’s price will move up or down. A trader anticipating that the euro will increase in strength relative to the US dollar would buy the currency pair, EURUSD. On the other hand a trader anticipating that the euro will decrease in strength relative to the US dollar would be looking to sell short the EURUSD.

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In general, trading can be considered to be much more short-term in nature than investing. Whereas an investor may hold a position for months and years a trader may hold a position for only a few minutes and even up to several days or weeks.

Forex scalping – Scalping is a short-term trading method designed to capture small profits, often just several pips. Scalpers often place numerous trades during a single Forex trading session.

Forex day trading – Day trading in the traditional sense is different than Forex day trading. In the traditional sense of day trading there are no overnight positions held. Since the Forex market trades essentially around-the-clock day trading Forex can take place any time within a 24-hour time period. For instance, day trading could take place from the close of the New York session on one day till the close of the New York session on the next day. It is important to note that a trade of this length which is essentially 24 hours would be considered a long time to stay in a single day trade.

In general, in Forex trading you’re looking to profit from choosing the correct direction of a currency pair. Although trading in general can be spoken of to be, “short term” your objective is a trader is to profit consistently for long-term success.

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