EDUCATION CENTERArticlesIntroduction to Forex

Introduction to Forex

WHAT IS FOREX OR FOREX MARKET?

The Foreign Exchange market (also referred to as forex or FX market) is the largest financial market in the world, with over $1.5 trillion changing hands every day.

That is larger than all US equity and Treasury markets combined!

Unlike other financial markets that operate at a centralized location (i.e. stock exchange), the worldwide Forex market has no central location. It is a global electronic network of banks, financial institutions and individual traders, all involved in the buying and selling of national currencies. Another major feature of forex market is that it operates 24 hours a day, corresponding to the opening and closing of financial centers in countries all over the world, starting each day in Sydney, then Tokyo, London and New York. At any time, in any location, there are buyers and sellers, making forex market the most liquid market in the world.

Traditionally, access to forex market has been made available only to banks and other large financial institutions. With advances in technology over the years, however, forex market is now available to everybody, from banks to money managers to individual traders trading retail accounts. The time to get involved in this exciting, global market has never been better than now.

Forex market significantly differs from trading currencies on the futures market and is a lot easier than trading stocks or commodities.

Due to the market volatility (constant change of prices) and the resulting fluctuations in exchange rates, your investments may change in value after a certain period of time and in case of profit, your account will grow. With this in mind, it should be no surprise that many investors have taken advantage of the fluctuation in Exchange Rates, using the volatility of the Foreign Exchange market as a way to increase their capital.

Example: suppose you had $1000 and bought Euros when the exchange rate was 1.50 Euros to the dollar. You would then have 1500 Euros. If the value of Euros against the US dollar increased, then you would sell (exchange) your Euros for dollars and have more dollars than you started with.

Forex plays a vital role in the world economy and there will always be a tremendous need for the exchange of currencies. International trade increases as technology and communication increases. As long as there is international trade, there will be forexmarket. The FX market has to exist so a country like Germany can sell products to the United States and be able to receive Euros in exchange for US Dollar.

WHY FOREX TRADING IS SO POPULAR?

Because you can trade from anywhere. From your kitchen table, bedroom, garage or from the nearest Starbucks coffeehouse (most of them have wireless Internet connection).

If you travel, take your laptop with you and you can trade forex anywhere in the world where you have an Internet connection.

When you want to start trading forex market, nobody is asking you for a diploma, a formal license or a proof of how many hours you have spent studying the Foreign Exchange Market and/or Banking Industry.

Forex trading is economical and start-up costs are Low!
You can open your trading account with us with the initial deposit as little as US$ 250 using your desktop, web or mobile platforms.

The main benefits of trading forex market are:

YOU don’t pay commissions or fees!
YOU can trade 24-hours a day !
YOU can trade up to 400:1 leverage !
YOU can have FREE streaming executable price quotes and live charts!

WHAT IS LEVERAGE
ONE of the best advantages in Forex Trading is the ability to use leverage.

Forex brokers offer the highest leverage of up to (400:1) meaning if you invest $1,000, the broker will allow you to trade like you really have $400,000).
This type of leverage provided in forex does not exist in the equities or futures market.

Forex trading is still riskier than Stock or Futures Trading, where you can lose more than you have deposited in your account.

But because of the FX market’s deep liquidity and 24-hour continuous trading, dangerous trading gaps and limit moves are very rare.

Orders are executed quickly, without slippage or partial fills. And finally, there are no margin calls. For your protection, the broker will automatically close out some or all of your open positions if your account equity falls below the level required to hold the positions.

Currencies are traded in dollar amounts called “lots”

In Forex trading, with most brokers, you have the choice between 2 different lot sizes.

Standard Lots or Mini Lots.

One Standard lot is equal to $100,000 in currency. The margin requirements, using a 400:1 Leverage, would be US$ 250, in other word you control $100,000 worth of currency for only 250 US dollars.

Be aware, that your account size has to be more than the required margin of US 250. For example, if you place an order to buy 1 Standard lot (100,000) of USD/JPY and USD/JPY is quoted as 112.10/112.13, you buy USD/JPY at 112.13.

Your account balance would be $220, because you paid 3 pips spread or $ 30 for this trade.

If you would close this trade immediately, you have to sell it at 112.10 (the bid price), for a loss of $ 30.

In fact, in order to execute this trade your account balance has to be minimum $280. $250 for margin and $30 for the trade.

But if, after you have initiated the trade to buy USD/JPY at 112.13, and the USD/JPY falls the next second 1 pip (approx. $8), your position would be closed automatically, because of margin deficit.

HOW CURRENCIES ARE QUOTED

Currencies are always traded in pairs in forex. The pairs have a unique notation that expresses what currencies are being traded.

The symbol for a currency pair will always be in the form ABC/DEF. ABC/DEF is not a real currency pair, it is an example of a symbol for a currency pair. In this example ABC is the symbol for one countries currency and DEF is the symbol for another countries currency.

Some of the most common symbols used in forex are:

USD – The US Dollar
EUR – The currency of the European Union “EURO”
GBP – The British Pound or cable
JPY – The Japanese Yen
CHF – The Swiss Franc
AUD – The Australian Dollar
CAD – The Canadian Dollar

There are symbols for other currencies as well, but these are the most commonly traded ones.

A currency can never be traded by itself. So, you cannot ever trade the USD by itself. You always need to BUY one currency and SELL another currency to make a trade possible.

Some of the most traded currency pairs are:

EUR/USD Euro against US Dollar

USD/JPY US Dollar against Japanese Yen

GBP/USD British Pound against US Dollar

USD/CAD US Dollar against Canadian Dollar

AUD/USD Australian Dollar against US Dollar

USD/CHF US Dollar against Swiss Franc

EUR/JPY Euro against Japanese Yen

The currency left of the / is called the base currency.

The currency right of the / is called the counter currency.

When you place an order to buy the EUR/USD, for instance, you are actually buying the EUR and selling the USD.

If you were to sell the pair, you would be selling the EUR and buying the USD. So, if you buy or sell a currency pair, you are buying/selling the base currency.

The best way to remember is, by just thinking of the entire currency pair as one item.

If you buy it…you buy the first currency and sell the second currency. If you sell it…you sell the first currency and buy the second currency.

That means you should be able to short-sell with no restrictions, so you could make money when the market drops as well as when it rises.

The problem with traditional stock market or commodity trading is that the market has to go up for you to make money. With forex trading you can make money in all directions.