Forex trading works via a transaction between a Forex trader and a broker or market maker. The Forex trader chooses which currency pair he wants to trade in depending which he expects to have a change in value soon enough.
A Forex trade is placed by a trader through a broker. With just a couple of clicks on the trading platform, an order is immediately placed. The broker then passes the order to a partner in the interbank market. When a trade is closed, the broker closes the position and credits the trader’s account with either a loss or gain. This somewhat complicated process can all take place within several seconds to a minute.
Money or profit is made via the changing values of currency. Say for example the trader is from the US and wants to earn US Dollars. Our example trader then chooses a pair, which for the sake of giving out an example, is the USD/EURO currency pair. For the purpose of this example, let’s say 1.5 USD = 1 EURO. An investment of 150k USD in order to trade 100k EUROs. This means the trader invests 150k USD. Our trader waits until the currency pair value changes, like 1.7 USD is to 1 EURO. Once the value changes this way, our trader can sell is 100k Euros in order to get 170k. Simple math will tell us that the earnings is 20k USD, not bad for a first investment.
Trading units in the Forex market are called lots, which usually are too big for the regular trader. To help the financially challenged brokers came up with margin trading. To simplify, what happens is a trader can open a position with just a marginal amount, like 50 times smaller of the current Forex lot. The money is then supplied by the broker. The earnings are split depending on the ratio of the margin capital and the total money traded.
Forex traders lose money by executing trades based from uneducated decisions. This means decisions are not backed up by trending data as suggested by different trading software tools. Uneducated moves can cause great losses and even serious debts.