Lesson 1: What is Forex Trading?
Welcome to the World of Trading
Forex, also known as foreign exchange, FX and currency trading, is a competitive global market where all of the world’s currencies trade. The Forex market is the largest, most liquid market in the world with an estimated daily trading volume of more than $5 trillion. Not all of the world’s combined stock markets are even close to this. But what does that mean to you, though? Take a closer look at forex trading and you may find some interesting trading opportunities out of hand with other investments.
It’s All in The Exchange
If you’ve ever traveled abroad, you’ve made a forex payment.
Take a trip to France and turn your pounds into euros. When you do this, the
exchange rate between the two currencies— based on supply and demand —
determines how many euros you get for your pounds. And the exchange rate keeps
A single pound on Monday can give you 1.19 euros. That’s
1,20 euros on Tuesday. This small change may not seem like a big deal. Yet
think about it on a larger scale. A large international corporation may need to
pay its employees overseas. Think what you could do to the bottom line when, as
in the example above, you actually swap one currency for another, depending
more on when you do it? These few pennies are fast adding up. In both cases,
you— as a traveler or business owner — may want to keep your money until the
exchange rate is more favorable.
Forex: What’s Your Opinion?
Unlike shares, you can exchange currency on the basis of
what you think its value is (or where it is headed). But the big difference to
forex is that you can exchange it up or down just as quickly. When you think
the value of a currency is going to increase, you can buy it. When you think
it’s going to decline, you can sell it. With such a large market, finding a
buyer when you’re selling and a seller when you’re purchasing is a lot easier
than in other markets. You may hear from the news that China is devaluing its
currency to draw more foreign business to its country. If you think this trend
is going to continue, you can make forex trading by selling the Chinese
currency to another currency, say, the US dollar. The more China’s currency
devalues against the US dollar, the lower the earnings. If the price of the
Chinese currency increases while you have your sales place open, so your
profits increase and you want to get out of the trade.
Past performance: Past performance is not an indicator of future
How to Buy and Sell
All forex trades require two currencies because you are
betting on the price of one currency against another. Thought of EUR / USD, the
most exchanged currency pair in the world. EUR, the first currency in the pair,
is the base, and USD, the second currency is the counter. When you see a price
quoted on your website, the cost is how much one euro is worth in US dollars.
You always see two prices because one is a purchase price and one is a sale
price. The difference between the two of them is the distribution. If you press
to buy or sell, you buy or sell the first currency in a pair.
Let’s assume that the euro will increase its value against
the US dollar. The combination is EUR / USD. Since the euro is the first, and
you think it’s going to grow, you’re buying EUR / USD. When you think the euro
is going to fall in price against the US dollar, you are selling EUR / USD.
If the purchase price of EUR / USD is 0.70644 and the sale
price is 0.70640, the difference is 0.4 pips. If the trade moves in your favor
(or against you), then once you cover the spread, you can make a profit (or a
loss) on your trade.
Trading on Margin
When rates are quoted at hundreds of cents, how can you see
any meaningful return on your investment if you trade forex? The response to
this is leverage.
If you exchange forex, you basically borrow the first
currency in a pair to buy or sell the second currency. With the US$
5-trillion-a-day market, liquidity is so strong that liquidity providers— large
banks, basically — allow you to trade with leverage. You simply set aside the
necessary margin for your trading size to trade with leverage. Of example, when
you trade 200:1 leverage, you could trade £ 2,000 on the market while setting
aside just £ 10 in margin on your trading account. With 50:1 leverage, the same
volume of trade would still need only about £ 40 in margin. It gives you a lot
more visibility, while holding your capital investment down.
Yet leverage doesn’t just increase the potential for profit.
It may also increase the expenses, which may exceed the amount of invested
funds. When you’re new to forex, you should always start trading small, lower
leverage ratios before you feel comfortable on the market.
- INTRODUCTION TO FINANCIAL MARKETS
- BASICS OF TRADING
- TRADING PLATFORM