How does currency trading work? - A practical guide

There is plenty of theoretical information to be found about forex trading, but for beginners it isn't always that easy to apply all that knowledge in real trading situations.

In this article we'll use real examples to explain step by step how you can trade in currencies online at a forex broker.
Some theory has to be covered in order to do that, but don't worry: we'll also get down to some actual trading.

Opening an account at a broker

If you want to trade in currencies, you will first have to open an account at an online forex broker. Through an account like this you'll gain access to trading software, and through this software you can exchange one currency for another.

A broker that we recommend to currency traders is Plus500. The main reason for this is their straightforward and easy to use software, which will help you learn how to actually trade in currencies faster.

You can open an account at Plus500, and besides this they offer new members who verify their phone number a free €25 real money credit.
This will allow you to get the hang of forex trading without any sort of risk, something for which the unlimited demo account can be used as well. In this account, you'll receive a practice credit, which can be used to trade currencies against the real current exchange rates.

Click here to open a free account at Plus500 »

Keep in mind that your capital may be at risk.
Once you've opened an account somewhere - for this explanation it doesn't matter too much where - and you are logged in to the trading software, you will usually immediately see a screen that shows pretty much everything you'll need. At Plus500, that screen looks like this:

Plus 500 trading software



But before we start pushing buttons, it's necessary to explain first what actually happens when we do that.

By the way, if you at any point get the idea that you don't quite understand what we are talking about, then perhaps you should first read this article about what the forex market and speculative currency trading are exactly.

Leverage in forex

The values of currency pairs in forex trading only fluctuate by very small amounts at a time. These differences are so small, that they can only be expressed by using four decimals. Because it's very unpractical to pronounce numbers like that every time, a special unit is used to show exchange rate fluctuations in currency trading: the 'pip'.
A pip stands for 0.0001. So when the rate of the pair GBP/USD increases from 1.4375 to 1.4376, this means the price has gone up 1 pip.

Obviously these difference are very small, and therefore logic dictates that you'll have to trade large sums of money in order to make a decent profit.
But thanks to a thing called leverage, you won't have to come up with all that money yourself. Leverage allows you to trade for much larger amounts than you have in your account. A 50:1 (fifty to one) leverage on a currency pair for instance means that with just $10 in your account, you'll be able to spend $500 on buying and selling pairs.

Leverage in forex trading is relatively low-risk, and can often be used automatically. The maximum amount you can lose is whatever money you currently have in your account, so using leverage will never result in a negative credit.

Buying, selling and positions: the theory

Let's go back to that first screen of the trading software. You'll most likely immediately see a list of so-called currency pairs, like EUR/USD or AUD/NZD. Another name for a currency pair is an 'instrument'. The pairs in this list are the ones we can use for trading.

With every pair some rates are given, as well as buttons for buying (going long) or selling (going short). What this means exactly, is best explained by using an example.

Suppose the pair EUR/USD has a rate of 1.3172.

The left currency, in this case the euro, is what we call the base currency. The right currency, in our example the United States dollar, is referred to as the counter currency.

When you buy, the rate shows you how many units of the counter currency you have to pay, in order to buy 1 unit of the base currency. If we look at our example, it would for instance cost you 1.3172 US dollars to buy 1 euro.

With selling its exactly the other way around. In this case the exchange rate shows how many units of the counter currency you receive, when you sell 1 unit of the base currency. In our example you would receive 1.3172 US dollars if you sold 1 euro.

Buying and selling are both ways to "open an position". Which one you choose, depends on what you think is going to happen. If you expect that the value of the EUR relative to the USD will increase, then you should buy EUR/USD. But if you were expecting a drop in the value of the euro relative to the dollar, you would sell the same pair.

The fun really only starts after you've opened a position. Will the rates move into the direction you predicted?

You can always "close" a position you opened. This means you trade whatever you invested in the pair back against its current exchange rate. Of course, your goal is to close at a more favorable rate than what you opened at, because this means you'll have made a profit on a position.

Or in other words: you'll have speculated on the forex market successfully.

Buying, selling and positions: doing it

We are going to assume that by now you have a decent understanding of the theory. Let's put our knowledge to use, and do some actual trading.

Going back to our list, we'll see all kinds of pairs that are available for trading. We'll keep it simple by following our previous example, meaning we're going to buy EUR/USD.

In order to do this, we'll simply click on the button 'buy' located to the right of the pair. The following pop-up window will appear:

Buying currency pair



The current rate is the price at which you can buy the pair right now. In the field called amount you fill out for exactly how much you want to buy. Please note that at Plus500, leverage has already been applied to this amount. Seeing as the leverage for this pair is 200:1, we can use our €25 from the welcome bonus to buy €5,000 worth of this pair.

Let's take things a little slower than that, and buy €1,000 worth of EUR/USD. AS you can see on the image, this will only require us to spend €5 of our own money. We enter the number, and click on 'buy'.

We have now opened a position, and of course we'll want to monitor this investment. At most online brokers, this is a pretty easy thing to do.
At Plus500, all your positions will appear directly under the pair. Here you can also see the current win or loss expectation, based on the current rate of the pair compared to the rate when you opened your position.

Profit Plus500



Additionally, many brokers offer graphics which show the course of the rate. The recent high and low points of a pair are other useful pieces of data, as they give an indication of its level of fluctuation.

When you deem the time right, you can always close a position again. The option to do this appears immediately after you've opened a position. In the case of Plus500, all it takes is clicking on the button 'close position', which is shown to the right of the position.

You can do this by hand, but it's also possible to set a so-called stop/loss. In this case you enter a lowest point for the rate, and when this is reached, your position will be sold automatically. You can also set a highest point for the rate, at which your position will be closed automatically.
At Plus500, both can be entered in the same pop-up screen from where you buy or sell a pair.

Selling is done in the same way as all that we've described above, the only difference being that you start the process by clicking on the 'sell' button.

Ready to trade

And now you know pretty much all you need to know about trading currencies at the forex market. Of course there is always more to be learned, but you now have the theoretical and practical basis necessary to start trading at the forex market.

We advise you to use your demo account and free real money bonus at Plus500 to become more familiar with currency trading, before you get started with the real deal. Good luck!

Click here to start trading currency at Plus500 now »

When trading currency, keep in mind that your capital may be at risk.



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