Forex, also known as forex, FX, or currency trading, is a decentralized global market for all currencies that are traded around the world. This market is the largest and most liquid in the world, with a daily volume of operations that exceeds 5 trillion dollars. The other stock markets in the world as a whole don’t come close to this. But what does this mean to you? Take a closer look at forex trading and you will find interesting trading opportunities that are not available in other investments.
FOREX TRANSACTION: EVERYTHING IS IN THE EXCHANGE RATE
If you have ever traveled abroad, you have made a forex transaction. Travel to France and convert 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 will get for your pounds. And the exchange rate fluctuates continuously.
WHAT IS FOREX?
On Monday a pound could give you 1.19 Euros. On Tuesday 1.20 Euros. This small change may not seem like a big deal. But think about it on a larger scale. A large international company may have to pay foreign employees. Imagine what you could do to the bottom line if, as in the example above, does it cost you more to exchange one currency for another depending on when you do it? These few pennies add up quickly. In both cases, you as a traveler or business owner may want to hold your money until the exchange rate is more favorable.
OPPORTUNITIES IN FOREX: WHAT IS YOUR OPINION?
Similar to the stock market, you can change the currency based on what you think it is worth. (or where it is going). The big difference from Forex is that you can trade up or down just as easily. If you think that a coin will increase in value, you can buy it. If you think it will decrease in value, you can sell it. With such a large market, finding a buyer when you are selling and a seller when you are buying is much easier than in other markets.
If you think that the trend will continue, you could make a forex trade, selling the Chinese currency against another currency, for example the US dollar. The more the Chinese currency devalues against the dollar, the greater its benefits. If the Chinese currency increases in value while you have your sell position open, then your losses will increase and you will want to exit the trade.
How to buy and sell currency?
All Forex trading involves two currencies because you are betting on the value of one currency against another. Think of the EUR / USD, the most traded currency pair in the world. The EUR, the first currency in the pair, is the base, and the USD is the counterpart. When you see a price quoted on your platform, it is what one euro costs in dollars. You will always see two prices, one is the buy price and the other is the sell price. The difference between the two is the spread. When you click buy or sell you are buying or selling the first currency in the pair.
BASIC CONCEPTS OF FOREX TRANSACTIONS
Let’s say you think that the EUR will increase in value against the USD. Its pair is the EUR / USD. Since the euro is the first, and you think it will go up, you buy EUR / USD. If you think that the euro will fall in value against the US dollar, you sell EUR / USD.
If the buy price of the EUR / USD is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against) then once you cover the spread, it could be a profit or a loss on your trade.
FRACTIONS OF A PEN: TRADE WITH MARGIN
If prices are quoted to the hundredths of a cent, how can you see a significant return on your investment when you are trading Forex? The answer is leverage.
When you trade forex, you are effectively borrowing the first currency in the pair to buy or sell the second currency. With a market of US $ 5 trillion a day, the liquidity is so deep that the liquidity providers, the big banks, basically allow you to operate with leverage. To trade on leverage, simply set aside the margin required for your trade. If you are trading 200: 1 leverage, for example, you can trade $ 2,000 in the market while retaining only $ 10 in the margin of your trading account. For 50: 1 leverage, the same trade size would only require about $ 40 of margin. It gives you much more exposure, while keeping your capital investment low.
But leverage doesn’t just increase your earning potential. It can also increase your losses, which can exceed your deposited funds. When you are new to the forex market, you should always start trading with small leverage ratios, until you are comfortable in the market.