Top 6 MOST POWERFUL Price Action Candlestick Patterns Every Trader Must Know

Forex trading example
Say you opened a position with a broker that saw you simultaneously buy Australian dollars and sell US dollars. If the Aussie dollar strengthens against the US dollar over the coming days or weeks, you would then seek to close out your position by trading your US dollars for Aussie dollars, getting more Aussie dollars back than you originally sold. That's how a profit is realised on forex trades.

Of course, it's important to remember that at no stage during the above transaction do you actually own or take delivery of the currencies involved in the trade. That's why forex traded in this way is considered a derivative instrument. Its value is based on an underlying asset, without that asset ever being physically exchanged between the parties.

How leverage works in forex
Forex trades of the type above are typically leveraged, meaning you only contribute a small stake towards the total value of the trade. Most currency contracts are large. The minimum amount you can trade is typically 1,000 units (for example, $1,000). That's because currency exchange rates only fluctuate by small amounts, usually by tenths or hundredths of a cent. So to realise any significant profit or loss, you need to trade at high volumes. Leveraged trading (or trading on margin) allows you to take out a small stake in a much larger trade, with your broker typically making up the shortfall.

If the exchange rate moves in your favour, you stand to profit from the full amount that was traded, not just your small stake. Of course, it works in the opposite direction as well, so if the exchange rate moves against you, you are liable for the losses incurred on the full value of the trade.

That's why forex trading is typically considered to suit more experienced and less risk-averse traders. These days, the trading platforms offered by forex brokers are relatively sophisticated and come with a range of features and tools designed to help traders get the most out of their trades.

What are the benefits of forex trading?
Forex trading has many advantages for the right trader, starting with the fact that forex markets are highly accessible. Many are open 24 hours a day. Unlike the Australian Stock Exchange, for example, which only offers normal trading between 10am and 4pm on business days, the global forex market runs around the clock (but not on weekends).

This means foreign exchange prices are constantly going up and down and there are plenty of opportunities for traders. In addition, because forex is a leveraged product, individuals can trade on the market for a smaller initial outlay. In order to place a trade, you only need to spend a small percentage of the full value of your position, which means there is a much higher potential for profit from a small initial outlay than in some other forms of trading. Unfortunately, this also means there is a greater risk of suffering a loss.

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