First, there is a need to understand what forex exchange trading is all about. It is a process of skillfully trading different currencies from several countries. To give you a concrete example, let us take for example the dominant currency in Europe today called the Euro (EUR) and the flagship currency of the United States of America referred to as the US Dollar (USD). There exists a forex exchange if you are selling your US Dollar and at the same time buying Euro. A useful shorthand notation for this is EUR/USD. The first currency on the notation is the currency being bought and the second currency is the currency being sold.
Mechanism of Forex Exchange Trading
Forex trading might seem complicated from afar but with a little effort to comprehend, it can be done by anyone. Usually, especially if you are just beginning in this type of trade, it is recommended to do the transactions with the aid of a market maker or broker. In the process, the trader should select a pair of currencies to trade simultaneously.
Let us take again the example above. Say, that the pair EUR/USD has been chosen. If a trader selected to buy 1,000 EUR , it would cost him/her around 1,200 USD if the trading occurred at the beginning of the year 2005. On the other hand, if you choose to end your trading efforts by December 2005 when the 1,000 EUR has an approximate value of 1,300 USD, it means that you have earned a total of 100 USD within the aforementioned timetable doing forex exchange trading.
Foreign Exchange Trading – The Leveraged Type
Usually, aside from the factors mentioned above, there is a contract value. Let us use the same example wherein you intend to buy Euro and sell US dollars. There is such a thing as a contract value. For better understanding, there is a need to assign a value for the contract price for discussion’s sake. Let us say that the contract value is 100,000 Euro.
The contract value serves as the multiplier for the total earnings. In the case of the January 2005-December 2005 forex trading given above, the contract price is 1,000 Euro. Higher contract price presents more opportunities to earn; however, it also means that you have to risk more in terms of capital. Therefore, between a trading deal with a contract price of 1,000 Euro and 1,000,000 Euro, which one will possibly yield more in terms of income? The answer is pretty obvious – the one with a contract price of 1,000,000 Euro, of course.
Is there really a need to have a whopping 1,000,000 Euro just to proceed with the contract in this foreign exchange trading example? The good news is that you don’t have to have that big amount because you can leverage. For example, you can downscale the deal to 1:1,000. Instead of the need to have 1,000,000 Euro, you will only need 1,000 Euro.
With the leveraging process, you can earn more by trading with less. It means that you can take advantage of the fact that you can still study the directions and trends in connection with your pair of currency and taking the forex exchange trading challenge one deal at a time.