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Updated on May 7, 2010

Forex Trading - An Introduction

Trading in Forex is increasingly becoming popular these days. With the help of technology, the trading platforms have been totally reshaped in a manner which tend to attract more and more people into this revolutionary and advanced method of earning. With the ease of online trading, many people find it extremely handy to test their trading skills and chek their luck on trading currencies on internet.

Also known as trading in currencies or currency pair, it basically involves purchasing a currency against other at a particular rate and then selling the same at a higher rate. A basic example would be EUR/USD = 1.2688

Which means that you bought 1 Euro by spending 1.2688 USD. For instance, if subsequently rate is changed to EUR/USD = 1.2799 then it implies that 1 euro can be sold at the rate of USD 1.2799 hence the profit earned on this transaction can be 1.2799 less 1.2688 which amounts to 0.0111 USD.

Following are some other terms for understating:

Offer Price

Minimum Price at which a seller is willing to sell its currency.

Bid Price

Price at which a potential buyer is agreed to purchase the currency.

Long Position

A long position refers to the conventional way of making a transaction in which a buyer first purchases a currency and then sells it. This strategy is successful in a rising market.

Short Position     

It is Sell and Buy position in which first the currency is sold and then bought. This is successful in a declining market.

Limit Order

With the help of modern trading platforms, the risk can be minimized. A limit order is a order to buy or sell with a ceiling attached to it. The transaction is automatically executed once the system reaches the limit. This is used to buy below the market or sell above the market.

Stop Loss OR/ Liquidation Limit

This is a very good tool to control the risk. This is defined as the lowest rate below which a buyer does not have the holding power. For example, a buyer bought EUR/USD = 1.2688. Then he can put a Stop Loss at say 1.100. If the system reaches at this rate, the currency in account will automatically be sold avoiding the loss beyond this point.   


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