WHAT IS FOREX ?
The foreign exchange market (forex, FX, or currency market) is a worldwide Market, over-the-counter financial market for trading currencies. It is the largest financial market in the world with a volume of over $1.3 trillion a day worldwide. Total forex trading volume is well over three times the total of the stocks and futures markets combined.
There is no central marketplace for currency exchange. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
In the foreign exchange market there is little or no ‘inside information’. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
How to trade Forex ?
As currencies are traded in pairs, when you make a trade you are referred to as “Long Position” on one currency and “Short Position” on the other. For example, if you sold one standard lot (equivalent to 100,000 units) of EUR/USD, you would have exchanged Euros for Dollars and would be “short” on Euros and “long” on Dollars.
Put slightly differently, if you purchase a PC for $500, you are exchanging your money for that PC. You become “short” $500 and “long” one PC. This same principle applies to trading currencies in the Forex market.
Long PositionA trader suspects that the Euro will strengthen against the Dollar, and decides to ‘buy’, or ‘Long Position” on €10,000, at a price of 1.4989, with a leverage scale of 1:100.
Deposit needed = (10,000 x 1.4989/100) = €149.88
To the traders’ fortune, the Euro strengthens against the Dollar. The trader then decides to ‘sell’ €10,000 in order to close the trade, at a price of 1.5076, a rise of 87 percentage points above the opening position.Profit made: (1.5076-1.4989) x 10,000 = $87
Alternatively, if the Euro weakened against the Dollar – contrary to the traders’ prediction – with the sell price dropping to 1.4902, the trader may decide to ‘sell’ at this point, and close the €10,000 trade.
The trader’s loss would be: (1.4989-1.4902) times 10,000 = -$87
Short PositionLet’s take the following scenario; after conducting some thorough research, a trader believes that the US Dollar is likely to soon strengthen against the Euro. Consequently, the trader decides to go short on EUR/USD – purchasing Dollars in exchange for Euros. The currency pair is currently trading at bid/ask rate of 1.6764/1.6770. The trader selects the maximum leverage scale of this currency pair, 200:1, and ‘sells’ $10,000 at that rate of 1.6770.
To calculate initial deposit:Amount of currency to purchase x counter currency exchange rate / leverage scale
That means a payment of $83.85 is required for the initial deposit (10,000 x 1.6770/200). After a short period, the market moves in accordance with the trader’s prediction, and the Dollar strengthens against the Euro.
The bid/ask rate becomes 1.6811/1.6817, and the trader decides to close the position here. The trader ‘buys back’ the €10,000 at a price of 1.6811.
The trader opened at 1.6770 and closed at 1.6811, an increase of 41 percentage points (pips).
To calculate profit:Profit = (price closed at – price opened at) x amount of currency purchased
So, the trader has earned $41 from this trade [(1.6811-1.6770) x $10,000].
In an alternative scenario, the markets move in the opposite direction to the trader’s position: the Euro strengthens against the Dollar. As a result, the trader decides to ‘buy back’ the €10,000 when the bid/ask rate reaches 1.6720/1.6726.
To calculate a loss:Profit = (price opened at – price closed at) x amount of currency purchased
In this instance, the trader made a loss of $50 from this trade [(1.6770-1.6720) x $10,000 = $50].
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