Forex is the common abbreviation for the Foreign Exchange Market, a large, globally traded, exchange that encompasses transactions between all of the world’s currencies. Forex is a liquid market where trillions of dollars in volume are traded on a daily basis. Possessing no centralized exchange, unlike the S&P 500 or the DAX, Forex gives traders instant, real time access and trading opportunities, 24 hour hours a day, 5 and 1/2 days per week.
Every time a business seeks to purchase foreign goods, that business’ must first exchange their currency for that of the foreign country. When you take your dream vacation you most often turn your money into the local cash. These conversions are based on the exchange rate between those two currencies. With today’s global economy and massive international trade and travel, it is not hard to envision the constant fluctuations of the exchange rates. This is where, like in other financial markets, traders can take advantage price action and make profit.
Currencies are traded in pairs. Each pair is considered a separate security or financial instrument. The real time exchange rate of the pair, is it’s market price. The EUR/USD is the most widely traded currency pair in Forex. F1pro.market Now, let us say, for example, that the ECB, or European Central Bank, recently made a decision on the interest rate of the Euro. This would most likely cause a major fluctuation in the exchange rate of the EUR/USD. This is where you, as a trader, would speculate on its direction and look for trading opportunities. If you are of the opinion that the rate will rise, than you would buy the pair at the current market price. If your analysis leads you to believe that the rate will fall, than you would sell. Regardless of the market’s direction, accurate analysis and speculation can lead to windfall profits.
WHAT ARE PIPS, MARGIN, AND LEVERAGE?
Currency values are shown in the hundredths of cents. This fraction of price is called a pip. The EUR/USD typically moves 50 to 100 pips on a daily basis. How can a trader make money on such a small price action? By trading on margin is how. Margin is the the smaller amount of money required by a broker to control, or take a position with, a larger amount. The ratio between these two amounts is called leverage. Because of the massive amounts of liquidity in Forex, banks allow traders to use leverage to take advantage of even minimal changes in price. Margin is a percentage of your full position, while leverage is the ratio between the two. Here is an example: with $1,000 deposit, a broker allows you to control $100,000. This means the margin is 1% and the leverage is 100:1. Therefore, this larger amount of exposure gives each pip a higher value and gives a 50 to 100 pip move in the EUR/USD much more profit potential. Leverage can also lead to higher losses if the trade moves against you.
WHY TRADE FOREX?
Forex trading involves risk that many investors may not have the appetite for. Yet, more risk can mean even more reward! Is Forex right for you? Find out with a free demo account provided by most reputable brokers and get started today!