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Forex trading has become one of the hottest topics of conversation on the global financial scene, regularly hitting the business news headlines and sparking a thriving industry of forex brokers.
But what exactly is Forex trading? Here we provide a brief overview of this hot trading option, including an introduction to long and short trading.
What is Forex Trading?
An amalgamation of FOReign currency and Exchange, Forex trading – also known as FX or Currency Trading – is simply the exchange of one currency for another, e.g. exchanging Euros for US Dollars. A common transaction for holidaymakers and large companies for decades, the advent of the internet and Forex Brokers has resulted in Forex Trading exploding in popularity amongst individual traders.
Considered one of the largest and most liquid markets in the financial world, Forex is also all but immune to the influence of rogue traders due to the vast scale involved – making it an ideal investment vehicle for those looking to make a profit.
Long and Short Trading?
Long Trade
A long trade, also known as “going long”, refers to an investor buying a particular currency with the expectation that the value of that currency will increase in relation to another currency. Let’s take a look at a simple example to see how this works in practice.
In our example, our trader is of the view that the value of the US Dollar is about to INCREASE in relation to the British Pound (£). The manner in which to profit from this opinion is to first exchange US Dollars for British Pounds and then exchange Pounds back to Dollars at a later time. E.g.
- Day 1: Trader buys US$1000 worth of GBP at an exchange rate of 0.8, receiving £800.
- Day 7: With the USD/GBP exchange rate having dipped to 0.75, the trader can convert his £800 back into USD, receiving a total of $1066.67 (800 ÷ 0.75 = 1066.67) resulting in a total profit of $60.67.
Short Trade
The opposite of a long trade, a short trade is an act of selling a currency with the expectation that its value will decrease in relation to another currency. Short trades are generally carried out via a specialist Forex broker or Spread platform.
With short trading, the profit is gained through selling one currency at a specific price, before then buying it back at a lower price at a later date. Let’s take another example, but this time where the investor expects the value of the US Dollar to DECREASE in relation to the GBP.
- Day 1: Trader Sells USD 1000 at a price of £0.83 per $1, receiving £833.
- Day 7: With the USD/GBP exchange rate having fallen to $0.77 per £1, the trader can exchange his £833 back into $’s, receiving. $1081.81 (833 ÷ 0.77 = 1081.81), for a profit of $81.81.
Profit from Volatility
And that, in a nutshell, is how it all works. It can of course become a fair bit more complicated with the addition of products CFDs, Forwards and Futures trades, but for those first entering the Forex markets, simple long and short currency trades can be the best place to start.
They can also provide plenty of opportunities for relatively quick profits in what is a volatile market. Many factors can affect currency performance, from rising and falling interest rates to geopolitical events, and plenty more besides. Develop an ability to accurately assess these factors, and spot any patterns in the market, and you will be well on your way to Forex trading success.