Placing a Trade in The Forex Market

Placing a trade in the forex market is basically the same as placing a trade in any other market. Some people get confused because they feel they are not buying or selling anything like in the stock market, were you buy or sell part of a company.

We will dissect a trade from beginning to end in order to understand what is being done in the process.

Step 1: The trader has USD 10,000 in his forex broker account.

Step 2: In the morning the GBP/USD quote is 1.7478. This means that every GBP (Great British Pound) is worth 1.7478 dollars (i.e. 1:1.7478). Based on his analysis, the trader thinks that within the next 24 hours the GBP will gain strength against the US Dollar (i.e. a single GBP will exchange for more dollars). The trader wants to profit from the speculated move.

Several pro’s and con’s for the individual trader

Pro's:1. The trader can respond to currency moves caused by economic, social and political events at the time they occur. This is a huge advantage the forex market has over any other markets. If a company listed on the NYSE is scheduled to release quarterly earnings after the close of the market (as they almost always do), owners of the stock cannot react to the data (since there is no after hours trading) and may suffer
huge losses depending if they are short or long the stock once the market opens again the day after.

2. A trader has the opportunity to have an active market no matter what part of the world he or she lives in. As an example, if someone living in Australia would like to trade the US stock market they would have to be awake all night because of the time differences. Not so with the FX market.