Outlining A Sample Trade In Forex Trading
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Forex currency trading can look complicated to a novice, so it is useful to outline a sample trade in order to shed some light on what is actually a rather simple process. Forex trades are always quoted in paired currencies. Here is a very simple example of a listing:
GBPound/USDollar Bid=1.7439 Ask=1.7442
The paired currencies here are the British pound and the United States dollar. The ‘bid price’ is the price in US dollars at which a broker will buy British pounds, and the ‘ask price’ is the price in dollars at which a broker will sell pounds. The difference of 0.0003 between these two numbers is the ‘spread,’ and the source of a broker’s profits.
Forex trades typically occur in lots of 100,000 units. Per the above example, in order to make a single trade you would be required to buy 100,000 pounds at a total price of $174,420. This is an enormous outlay for even experienced traders, which is where the concept of ‘leverage’ comes into play.
Leverage offers a way to use small amounts of capital to invest much larger sums. Brokers typically loan their clients the vast majority of the monies needed for transactions, often providing up to ninety-nine percent of the necessary capital. This relationship is at the heart of leveraged investing.
If the investment is a winner, there is no need to worry; the investment can be liquidated at a profit and all monies are safe. If the investment is a loser, the broker may liquidate the position at a loss in order to protect his ‘loan’ to the client. If the broker has a good relationship with the client, he will give a warning and allow the client to inject new monies into the investment in order to forestall a liquidation and allow the investment time to recover a positive gain.
Leveraged for ninety-nine percent, a purchase of a single 100,000 unit lot of pounds at an ask price of 1.7442 would cost you $1744.20 (1% of the total price of $174,420). Fair enough, but how does one make a profit?
Outlining A Sample Trade: The Potential For Profit
Still using the above sample trade, pretend the market rises to the following:
GBPound/USDollar Bid=1.7445 Ask=1.7448
If you decide to sell, the total price is $174,450. Your profit is the sale price of $174,450 minus the initial buy price of $174,450, or $30. This may seem like a meager sum, but remember the deal was leveraged and you only had to front the relatively modest sum of $1774.20. This is how fortunes are won in Forex trading!
Additionally, price swings of several ‘pips’ (ten-thousandths of a point) can occur frequently in the Forex market, so under ideal circumstances the opportunity to reap a profit can arise in just a few minutes. Forex is also a twenty-four hour market, so the investing action really is non-stop! Of course, in a sample trade you can also wait longer periods for more substantial price changes to take place. With experience, you will find a style of trading that suits you.