Trading in the Forex market can be compared with a work of exchange office, where one can buy a currency of one country for a currency of another one. The principal difference between them is that Forex trading doesn’t imply physical exchange of money, which represents an absolute benefit for speculative transactions.
Just as with a currency, you can trade in precious metals in the Forex market, such as gold and silver, which actually also have a status of the world’s reserve currency.
Example of trade in gold
Assuming that current value of one ounce (~28.3 grams) of gold is $1 000. You suppose that the price for gold will rise in the short run.
You go to a bank and buy a bar of gold (you pay $1 000 in cash and get 1 ounce of gold in the form of the bar). By doing so, you execute the first part of the trade – you open the trade.
The gold price rises up to $1 050 in a month. You go to the bank and sell your gold (you give 1 ounce of gold in the form of the bar and get $1 050 in cash). By doing so, you execute the second (the last) part of the trade – you close the trade.
As a result, you earn a speculative profit of $50: you paid $1 000 for buying the gold bar and got $1 050 for selling it, so your margin is $50.
At first glance, this sum of money doesn’t seem considerable. However, if you increase a volume of the trade, the profit will increase considerably too. If you buy 100 ounces of gold, the profit will amount to $5 000. If you buy 1 000 ounces of gold, the profit will amount to $50 000.
Where can you obtain a large sum of money to trade such a large lot of gold? It can be obtained from a broker as leverage for free. If you have only $1 000 at your disposal, you can buy and sell 100 ounces of gold or ~2.83 kilograms. This lot of gold costs $100 000 at the price of $1 000 per ounce. We shall tell you about it in more details in one of our subsequent articles.
How to trade in currencies?
It is the same as with the example of trade in gold. You buy or sell a currency at a specified exchange rate. When the rate changes, you make a reverse trade. Difference between the exchange rates multiplied by a trade size (trading volume) is your profit. The whole process goes by the use of a special computer program called a trader’s trading terminal.
Some specific features of the Forex trading:
Exchange rates change quickly enough in a real-time mode;
Possibility to trade in currencies of virtually any countries, including the Euro, the British Pound, the Japan Yen, etc.;
Forex trade might last from several seconds to several months;
No need to buy/sell physical money and find a place to store it;
Marginal trading allows you to make trades, which volume exceeds your own funds by tens and hundreds times;
A variety of auxiliary tools, which allows chart analysis and price forecasting, are available.
Should you have any questions, ask them in the comments on the article.