Electronic Currency Trading: How It Works
Electronic currency trading is simply a way of dealing in currency exchange online. You may have seen it described as foreign exchange, forex or fx trading. It is something that appeals to many people who are looking for a way to make money on the internet using their home computer.
Forex is a little like stock trading, although the market itself is very different. You have the same aim of buying something hoping the price will rise. But with forex you are always dealing with money so you can also make money from a falling price, by exchanging out of the falling currency into a steady or rising currency.
Imagine for example that you are trading on the currency pair EUR/USD. This is a common combination for beginners. The US dollar and euro are most traded currencies and there is a lot of information available to help you, so it is a good choice to start.
With this pair you can choose to either buy or sell euros. If you place a buy order, this is called ‘going long’. You would do this if you think the euro will strengthen or rise in value (or the dollar will fall).
If you place a sell order, that is ‘going short’. You would do this if you think the dollar will strengthen (or the euro will weaken).
Your aim is to make a profit by closing the trade when the price goes the way that you anticipated. Closing the trade would involve selling euros if you had gone long, or buying them if you had gone short.
Of course, there is a risk. The price could go the wrong way, and you could make a loss. So it is important to have good information and a profitable trading system.
You do not need a lot of money to get started with electronic currency trading. Many brokers will let you begin with a couple hundred dollars, although it is better if that is not all the money that you have in the world!
Forex trading involves margins. This means that you can place orders for a lot more money than you actually have. You do this through a broker who will guarantee the balance of the order. They know you will be closing the trade at some time and if one currency is falling, another is rising. Currency values are relative, so it is not possible for all currencies to crash in the way that all stocks can crash.
Currencies can be very volatile but you can use stop losses to ensure that you do not lose more than you are willing to risk. Some brokers operate limited risk accounts where they will automatically close your trade if you lose the balance of your account. This means you do not have the dreaded margin calls which can be so disastrous for stock traders.
