The foreign exchange market, or Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen.

The value of your Forex investment increases or decreases because of changes in the currency exchange rate or Forex rate. These changes can occur at any time, and often result from economic and political events. Using a hypothetical Forex investment, this article shows you how to calculate profit and loss in Forex trading.

To understand how the exchange rate can affect the value of your Forex investment, you need to learn how to read a Forex quote. Forex quotes are always expressed in pairs. In the following example, your pair of currencies are the U.S. Dollar (USD) and the Canadian Dollar (CAD). The Forex quote, USD/CAD = 170.50, means that one U.S. Dollar is equal to 170.50 Canadian Dollars.

The currency to the left of the “/” (USD in this example) is referred to as base currency and its value is always 1. The currency to the right of the “/” (CAD in this example) is referred to as the counter currency. In this example, one USD can buy 170.50 CAD, because it is the stronger of the two currencies. The U.S. Dollar is regarded as the central currency of the Forex market, and it is always treated as the base currency in any Forex quote where it is one of the pairs.

Let’s go now to our hypothetical Forex investment to show how you can profit or come up short in Forex trading. In this example, your pair of currencies are the U.S. Dollar and the Euro. The Forex rate of EUR/USD on August 26, 2003 was 1.0857, which means that one U.S. Dollar was equal to 1.0857 Euros, and was the weaker of the two currencies. If you had bought 1,000 Euros on that date, you would have paid $1,085.70.

One year later, the Forex rate of EUR/USD was 1.2083, which means that the value of the Euro increased in relation to the USD. If you had sold the 1,000 Euros one year later, you would have received $1,208.30, which is $122.60 more than what you had started with one year earlier.

Conversely, if the Forex rate one year later had been EUR/USD = 1.0576, the value of the Euro would have weakened in relation to the U.S. Dollar. If you had sold the 1,000 Euros at this Forex rate, you would have received $1,057.60, which is $28.10 less than what you had started out with one year earlier.

As with stocks and mutual funds, there is risk in Forex trading. The risk results from fluctuations in the currency exchange market. Investments with a low level of risk (for example, long-term government bonds) often have a low return. Investments with a higher level of risk (for example, Forex trading) can have a higher return. To achieve your short-term and long-term financial goals, you need to balance security and risk to the comfort level that works best for you.

To learn quickly about forex trading and how you can make money in 5 hours a week click here

Forex Trading: Calculating Profit And Loss In Foreign Currency Trading is a post from: Great Forex World

Remember that the majority of traders beginning out in forex trading lose money, so it is crucial to carry out everything you can to make certain that you are one of the profitable ones. Having a strategy will give you a head start over most traders who simply start trading with no route map of where they are heading.

Having a profitable method is important of course and there are many of those off the peg systems available. Most traders think that the trading system is the only thing that matters and use up all of their time searching for the flawless system that is guaranteed to make money for anyone. But no such trading system exists. Although there are a bunch of fine systems, no system will be successful without a trading plan that is tailored to the specific trader, it needs to be a customized fit for you.

This means that you need to figure out your trading plan for yourself. Do not be alarmed however for the reason that it is quite straightforward. Your plan just needs to include these three things:

1. Lot size or Size of Trade

This can be measured in the number of positions that you are able take on every single trade. Lots may vary according to the strength of your signals or it may possibly be the same for each trade, but it ought to be clearly set out when you get your foreign exchange quotes before starting to trade. Do not vary your lot size according to intuition, and do not vary it according to whether your earlier trades were winning ones or not.

When you are deciding on your lot size, you must also consider your gearing and what proportion of your total funds will be committed to a trade. This is part of your risk management plan and it is critical part of currency trading knowledge that you ought to always have by your fingertips.

2. Stop losses or Mitigating Your Loss

Your strategy really must include a stop loss which is measured in terms of the number of pips. Again you ought to consider the risk that you are taking as a proportion of your overall funds. In most cases you should target for a risk of around 2% for each trade. However, with several systems or if you have a very low initial trading pot, you might want to go higher than that to prevent your stop losses being triggered too often. Just be wary that if you do that, you have a much greater danger of going bust than if you stick to the previously agreed lot size.

3. Level of Profits - Satisfactory Winning Positions

You ought to also settle on the exit position for a winning trade before you start, i.e. how many pips are you aiming to take. If you do not settle on this at the beginning you will often be tempted to hold out as long as possible, praying that the trend will keep going your way. Often times you will be caught out by an unexpected reversal and a profitable trade can be turned into a loss. So it is essential to decide ahead of time how much profit you will take.

To learn more about forex trading then click here

Once you have your strategy, it is crucial to keep to it consistently. Avoid the temptation to trade when the signals are not quite right, or to pursue your gut feelings in anything, at least until you have many years’ experience of the market. Also, reduce interruptions whilst you are trading. This will help you to keep away from making foolish mistakes and keep your concentration levels high so that you can make the best use of all of the foreign exchange trading information that you have acquired before scrutinizing the foreign exchange quotes from your broker and deciding whether or not to place a trade.

Jon Roshwood is a researcher and writer in the Foreign Exchange field. Jon regularly contributes articles to blogs and publications. He specializes in providing information on foreign exchange quotes and has written an excellent review on the pros and cons of using the automatic forex trading robot FAP Turbo . Clicking on these links will also take you to a place where you can also subscribe to receive a free ebook called Forex 101. If you would like to go directly to the FAP Turbo web site then please click here.

Foreign Exchange Trading Knowledge – Foreign Exchange Quotes is a post from: Great Forex World