What is Forex Trading?

How an FX Trade Works

In the FX market you can buy or sell one currency for another. When you buy a currency, you are said to be "long" in that currency and when you sell a currency, you are said to be "short" in that currency. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies in order to make profits - since the objective is to earn a profit from their position. Placing a trade in the foreign exchange market is simple and the mechanics of a trade are virtually identical to those found in other markets. Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of EUR/USD you can close out that position by subsequently going short in one EUR/USD lot (at the prevailing bid price).

Example of How FX Trade Works

Trader's ActionEurosUS Dollars
A trader purchases 10,000 Euros in the beginning of 2001 when the EUR/USD rate was .9600.+10,000-9,600
In May of 2003 the trader exchanges his 10,000 Euro back into US dollar at the market rate of 1.1800.-10,000+11,800
In this example, the trader earned a gross profit of $2,200.0+2,200