HOW FOREX TRADING WORKS?

FOREX Structure

·  A Forex transaction always consists of a currency pair, such as the euro and the U.S. dollar. Each currency pair has an exchange rate that's written in a standardized format. For example, EUR/USD = 1.3755 is the format for the euro/U.S. dollar pair and means that at the time this price was quoted it cost $1.3755 to buy one euro. The exchange rate can change by a very small amount (called a pip), which for the EUR/USD pair is 1/100 of a cent. Each currency pair has its own format, but they all follow this pattern. When a Forex trader wants to make a transaction, he goes to a currency dealer (usually called a broker) who executes the trade. Forex trading is largely unregulated, so experienced traders prefer to deal with a broker who belongs to a self-regulating organization like the National Futures Association.
Read more: How FOREX Trading Works | eHow.com http://www.ehow.com/how-does_4895869_how-forex-trading-works.html#ixzz0zCxNpgmw       

Trading FOREX   

·  The Forex market, like other securities markets, negotiates prices using a bid/ask system. A seller states an asking price and a buyer makes a bid. For wholesalers (banks, governments, and large hedge funds) the "spread" between bid and ask is usually only 1 or 2 pips. Retail brokers mark the spread up 3 to 20 pips and keep the spread as their fee instead of charging a commission like stockbrokers. The Forex trader tries to anticipate which way the currency exchange rate will move and "goes long" if she thinks a currency's value will rise against another currency. He "goes short" if he thinks it will fall. When Forex traders guess right and the change exceeds the spread, they make money.
Read more: How FOREX Trading Works | eHow.com http://www.ehow.com/how-does_4895869_how-forex-trading-works.html#ixzz0zCxS6rb0                      

Margins·                 

 What makes Forex trading so popular---and high-risk---is that trading is done with very low margin requirements. If you buy a stock on margin, FTC rules require you to put up 50 percent of the price of the stock. Forex trading works as it does because it isn't regulated, and it's common to have ratios of 30, 100, and up to 400 to 1. This means you can put down 1/400 of a standard lot of $100,000 worth of currency with as little as $250. The trader "borrows" the remainder from the broker. Usually this is for a very short time, since most Forex trades are settled within 24 hours and brokers usually don't charge interest.

Profit and Risk

·  The low margin requirements make the pip very important. For a lot of $100,000 a change in the exchange rate of just 1 pip equals $10 and a change of 1 penny (100 pips) equals $1000. As a result, a Forex trader can make or lose a lot of money very quickly. For example, suppose you buy a $100,000 (USD) lot of euros with a 100: 1 margin. You put up $1000 and the spread is 10 pips ($100), which the broker keeps. If the euro goes up by 1/2 cent against the dollar overnight, you make $500 minus the spread, or $400 profit, a 40% gain in one day. But if the market goes the other way, and the euro loses 1/2 cent, you lose $500 plus the spread, for a total loss of $600.
Read more: How FOREX Trading Works | eHow.com http://www.ehow.com/how-does_4895869_how-forex-trading-works.html#ixzz0zCxVw9FH

WHAT IS FOREX TRADING?

Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange.For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called going long on the EUR/USD.Forex trading is typically done through a broker or market maker. As a forex trader you can choose acurrency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

Suggested Reading

What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with Forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.