Understanding Forex - #1 - What is Forex?
This is a series of articles on the foreign exchange market. You will learn here what Forex is, how it works and how profitable it can be. The entire series contains the following articles. . .
- What is Forex?
- Technical analysis
- Fundamental analysis
- Money management
- Compound interest
What is Forex?
The word Forex stands for The Forex Exchange Market. This is the most liquid market in the world where you can trade or exchange one currency for another. For example, if you think the euro will appreciate in value and you have US dollars, you can exchange dollars for euros. If you are right and the euro appreciates in relation to dollars, then you can close the position by making a profit.
This is the idea behind the Spot Forex Market. This is an interbank system, which means it is not centralized. There is no central exchange where currencies are traded. It is a global market. You can trade Forex online 24 hours a day, 6 days a week.
This market emerged in the early 1970s. The reason was that currencies were no longer supported by gold. They began to float freely. Their value depended on the forces of supply and demand due to economic factors, speculations, etc. This gave rise to the Forex market.
You can trade Forex on the Internet as I said above. There are many brokers like www.oanda.com that allow you to open an account with only $ 300 to $ 500 and start trading online. You can also open a demo account first and trade with fake money just to & # 8220; test the waters & # 8221; and see if you like this market or not.
Demo accounts are free with most brokers. Some brokers offer demo accounts that expire within 30 days while others never expire. It is important to trade on paper, because you can test your strategies and see if they work or not.
Forex trading is risky, but it can also be very profitable. You can trade anywhere from 20: 1 to 400: 1 leverage. This means that the broker will lend you more money than you have in your account to trade.
For example, let's say a broker allows you to trade with a leverage of 100: 1. If you use full leverage, for every dollar you have in your account you can trade 100. Let's say you have $ 1,000. With $ 1,000 at 100: 1 you can exchange $ 100,000 in dollars for other currencies. You multiply your trading potential a lot. This allows you to make larger profits, but you also incur greater risks.
Let me show you an example. Let's say you have 100: 1 leverage on your account and trade at full leverage with $ 1,000. The EUR / USD (Euro / US Dollar) pair is trading at 1.2500. Then, enter a position on this pair.
Let's say you are long. If the market moves in your favor by just one cent (1.2600), you will double your money and end up with $ 2,000 in your account. If the market moves against you by just one cent (1.2400), you will lose all or most of the money you have in your account depending on the broker you are trading with.
This can happen very quickly. The market can move that much in minutes or hours. This is what makes Forex very profitable, but also very volatile. I don't know if novice traders can understand the magnitude of what I'm saying here. Many people enter Forex trading by seeing only half of the truth. They are attracted to this market by all the hype surrounding it.
I believe that no other market in the world offers the opportunity to make money like this market. On the other hand, there are some risks. It is important for new traders to trade on paper before compromising real capital. We learn by doing. I didn't learn many basic concepts about this market until I started trading with a demo account.
Now, let me explain other important facts to you. The spot Forex market is traded in currency pairs. Whenever you enter a position, you trade one currency for another. For example, if you buy EUR / USD, you buy euros and sell US dollars. If you sell EUR / USD, you sell euros and you buy US dollars.
When entering a position, you cannot trade other currency pairs unless you have additional funds in your account, but you can trade several currency pairs at the same time as long as you have sufficient margin / funds to trade. If you've never traded Forex before, you can see how this all works when you practice with a demo account.
Another thing you would like to know is that Forex is traded in pips. Your profit on each trade depends on many aspects. One of these aspects is the pips. Another is the amount of leverage you are using per trade. A pip is the smallest unit that can move the price of a currency pair.
For example, in the case of EUR / USD one pip is equal to 0.0001. If the price is at 1.2500 and moves to 1.2501, it moves one pip. If you move from 1.2500 to 1.2600 it moves 100 pips, as in the example above.
Now, how much you make on each trade depends on how many pips you make and how much money you have invested in that trade. Also, what is the leverage for that account.
If you trade at full leverage with a 100: 1 leverage account and trade $ 1,000, if the market moves 50 pips in your favor, then you will earn $ 500. This can happen within minutes of placing your order.
However, more experienced traders would not recommend that you trade this way. The reason is that if the market moves against you, you could lose everything in minutes. It is better to have lower profit targets for each individual trade and increase profits over time.
The money management principles remain that it is best to never risk more than 1% - 3% of your capital, especially if you are an inexperienced trader. This is something I'll explain more in another article in this series.
Well, I hope this information was useful to you. This was an introduction to the Forex market. You can read more about Forex in my other articles.