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Forex Beginners: What Happens When You Buy USD?

Posted on the 14 October 2013 by Rachelcool01
Let’s say that you are a new forex trader, you have found the online forex trading platform or forex brokers that you want to use, read widely around the literature, and are now ready to make your first forex trade. Let us also assume that you have chosen to buy USD. What actually happens throughout that first trade? In this article, we take a closer look at that first trade process and let you know what you need to look out for.
Forex TradingThe first, and probably most important thing to remember, is that now you are in the realm of real money trading and not on a practice account, the psychology of trading changes. You probably won’t experience the same level of success that you did in your practice account because you won’t be taking the same approach to the trades. This may sound like encouragement to take more risks in the real world, but remember that the potential for substantial losses is much more significant too.
So, you have chosen to buy US dollars. This means that you will have to give up, or spend, another currency in order to get those dollars (after all, you cannot buy US dollars with US dollars). The forex market relies upon the exchange rates between two currencies. When you put those two currencies together, you get a currency pair. Let’s say you are buying USD with GBP; your currency pair would be USD/GBP. You might get information like this:
Exchange Rate: USD/GBP = 0.622
This means that for every 1 USD you want to buy, you must pay 0.62 GBP. If you were planning to spend 500 GBP on your first forex trade, you would be able to buy 808.75 USD at that exchange rate. (It is worth noting that buying prices are usually higher than the exchange rate, but for simplicity’s sake, we’ll stick to one rate for now.)
You now have 808.75 USD. In order to make money on this trade, you need to wait until the exchange rate makes a profit possible. In other words, when you look at exchange rates again, you need to sell when a the rate for USD/GBP is higher than 0.622. If, in a week’s time, the exchange rate was 0.689, then you could sell. Your profit would then be worked out as follows:
808.75 (your USD) x 0.689 (the exchange rate) = 557.23 (your resulting GBP).
On first glance, you have made 57.23 GBP. Take out of that a transaction fee, say 2.50 GBP, and a percentage commission, say 8% at 4.58 GBP, and your total profit is now 50.14 GBP. This, in essence, is what happens when you buy USD on the forex market.
In reality, trades have more complexities and you should make sure you are fully educated as to the risks and costs of transactions before you trade real money. One of the best way's to get started in the forex trading world is to open a forex demo account so you can practice youre trading skills without risking any capital - if you haven't done this already then it's a highly recommended first move in the forex game.
Author Bio:
Robert Berkeley has successfully built Vantage FX UK Trading Limited, into one of the key players in the FX market across Europe with significant growth year on year. Robert regularly blogs about forex trading and comments on major fx new events.  

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