How does forex trading work?

The rate of exchange of one currency to the other may be determined in two ways:

• By the government, in which case the exchange rate is fixed.
• By market forces, in which case the demand and supply placed on currency by market participants will determine its value and rate of exchange to other currencies. In this case, we say the currency is floating. Floating currencies are the currencies traded on the forex market.

Forex trading is all about trying to benefit from the change in value of one currency relative to another, or the change in rate of exchange between one currency and another. How does this process work?

• The trader needs money to start with in order to conduct the exchange (trading equity).
• He will need access to the market where the currency exchange is done. Since the exchange is an online exchange (e.g. fxprotrading.com), the trader needs an internet connection on a computer or a smartphone.
• There has to be an exchanger to match the buyers of a currency to the sellers of a currency. In the offline market, these are the Bureau de Change operators. In the online forex market, these are the dealers/brokers. So the trader will need a forex trading account with a broker.
• There has to be a way for the trader to put money into his account and use it to exchange currencies, and possibly withdraw his profits and convert this into raw cash. So an acceptable payment method is required: bank wires, credit/debit cards and e-wallet accounts will serve this purpose so the trader must get at least one of these.

The trader takes his money and buys a currency which he thinks will rise in value against another currency which he simultaneously sells. If he is correct, he closes the trade by re-exchanging the currencies and keeps the balance from this transaction. It’s kind of like winning on a slot game. You put money in and see what comes out – and it’s either a win or a loss!