Understanding Forex – #1 – What’s Forex?
This really is a series of articles about The Foreign Exchange Marketplace. You’ll learn here what Forex is , how it works and how profitable it can be. The whole series contain the following articles
1. What is Forex
2. Technical evaluation
3. Fundamental evaluation
4. Money management
5. Compound interest
What’s Forex?
The word Forex is an acronym for The Forex Exchange Industry. This really is the most liquid market on the world where you can trade or exchange one currency for another. For example, should you think that the Euro will appreciate in value and you have US dollars, you can trade the dollars for the Euros. If you might be proper as well as the Euro appreciates in value in relationship with the dollars, then you can close the position realizing a profit.
That’s the basic idea behind the Spot Forex Industry. This really is an interbank program which means that it isn’t centralized. There’s no central exchange where currencies are traded. It’s a global market. You can buy and sell Forex online 24 hours per day, 6 days per week.
This market emerged at the beginning of the 70′s decade. The reason was that currencies where not backed up by gold anymore. They began floating freely. Their value depended on forces of provide and demand due to monetary factors, speculation, etc. This originated the Forex Market.
You can trade Forex on the Internet as I stated above. You will find numerous brokers like www.oanda.com that allow you to open an account with just $300 to $500 and start trading online. You can also get a demo account very first and trade with play cash just to “test the waters” and see should you like this marketplace or not.
Demo accounts are free with most brokers. Some brokers offer demo accounts which expire within 30 days although others never expire. It’s important to trade on paper, simply because you can test your strategies and see if they work or not.
Dealing Forex is risky, but it could be very profitable too. You can buy and sell at anywhere from 20: 1 to 400: 1 leverage. This means that the broker will lend you more money than you have on the account to buy and sell.
For example, let’s say that a broker allows you to buy and sell at 100: 1 leverage. In case you use all the leverage, for each dollar that you simply have on the account you can buy and sell 100. Let’s say that you have $1,000. With $1,000 at 100: 1 you can buy and sell $100,000 worth of dollars in exchange for other currencies. You multiply your trading potential a great deal. This allows you to realize bigger profits, but you also incur in bigger risks.
Let me show you an example. Let’s say which you have 100: 1 leverage on the account and you trade at full leverage with $1,000. The EUR/USD pair (Euro/US Dollar) is trading at 1.2500. So, you enter a position on this pair.
Let’s say which you are long. If the industry moves in your favor by just one cent (1.2600), you’ll double your cash and end up with $2,000 on the account. If the marketplace moves against you by just one cent (1.2400), you’ll lose all the funds that you simply have on the account or most of it depending on the broker you might be trading with.
This can happens actually quick. The marketplace can move this much in a matter of minutes or hours. This really is what makes Forex very profitable, but also extremely volatile. I don’t know if novice dealers can comprehend the magnitude of what I am saying here. Numerous people get into Forex buying and selling only seeing half with the truth. They get pulled into this marketplace by all the hype flying around it.
I do believe that no other market in the globe offer the opportunity to make funds like this market does. On the other hand, you can find some risks involved. It is crucial for new dealers to trade on paper initial before compromising real capital. We learn performing. I didn’t learn numerous basic concepts about this marketplace until I started trading with a demo account.
Now, let me explain other essential facts. The Spot Forex Market is traded in currency pairs. Whenever you enter a position you trade one currency for another. For example should you buy EUR/USD you might be buying Euros and selling US Dollars. If you sell EUR/USD you might be selling Euros and buying US Dollars.
When you enter a position, you can not buy and sell other currency pairs unless you have additional funds on your account, but you can trade several currency pairs at the same time as long as you have enough margin/funds to trade. Should you have in no way traded Forex before, you can see how all this works when you practice with a demo account.
Another factor that you would like to understand is the fact that Forex is traded in pips. Your profit on every buy and sell depends on numerous aspects. One of those aspects are pips. Another one is how very much leverage you might be using per buy and sell. A pip may be the minimum unit that the cost of a currency pair can move.
For example, in the case from the EUR/USD a pip is equal to 0.0001. If the price is at 1.2500 and it moves to 1.2501, it moved one pip. If it moves from 1.2500 to 1.2600 it moves 100 pips, like in the example above.
Now, how very much you make on every trade depends on how several pips you make and how a lot cash you invested on that trade. Also, what’s the leverage for that account. If you buy and sell at full leverage with a 100: 1 leverage account and you trade $1,000, if the industry moves 50 pips in your favor, then you will make $500. This can happen within just a few minutes after you enter your order.
Most experienced traders wouldn’t recommend you to trade this way though. The reason is the fact that if the market moves against you, then you could lose everything within minutes. It’s better to have lower profit objectives for every single buy and sell and compound your profits over time.
Cash management principles stay that it can be better to by no means risk more than 1% – 3% of your capital, specially if you’re an inexperienced trader. This really is something that I will explain more under other article of this series.
Well, I hope this info have been helpful to you. This was an introduction to the Forex Market. You can read more about Forex on my other articles.
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