The Forex market is a trade in currencies from the different countries to each other; for example, US dollar to euro. The Forex market is also called “Fx market”, “foreign exchange market”, “currency exchange market”. Forex traders aim to get profit on fluctuations of exchange rates, reflecting on whether there will be a cost of one currency, for example pound sterling, raise or go down in relation to another, for example, to US dollar.
The Forex market is the largest and most liquid market in the world with an average daily turnover of $3,98 trillion. Such a high liquidity in the market means that the prices can quickly change in response to news and short-term events, creating a set of trade opportunities for trade traders.
How does Forex work?
The Forex market works as well as other financial markets. Currencies are on sold and bought at a current rate. The currency price concerning other currency is called an exchange rate. As the US dollar is currency which dominates in the financial markets, exchange rates are expressed generally in US dollars.
Trade in the Forex market means borrowed funds/ And it means that it is necessary to lay off only small percent from the cost of the transaction which is made.
For example, if the broker offers leverage 100: 1, it is possible to open the transaction worth 100 000 pounds sterling. It leaves only 1000 pounds sterling on the account. This sum is known as a margin.
The margin acts as a deposit for covering any possible losses on auction. It is also impossible to make transactions, which require the margin exceeding the account sum.
There are two options of trade in Forex: purchase or sale.
An opportunity to get profit:
When purchasing it is necessary that the cost of basic currency was higher than the quoted currency in comparison with indicators at the beginning of trade.
At sale it is necessary that the cost of the quoted currency was higher than basic currency in comparison with indicators at the beginning of trade.
For example, if the exchange rate for EUR/USD was 1.1231 then when purchasing it is necessary that exchange rate increased in order that it was possible to receive more US dollars for each euro.
Types of currency pairs
There are two types of currency pair to trade:
Basic: any pair that includes US dollar as they are the most widespread transactions in the world. The spread size in the main couples is often small.
Quoted: pair that fluctuates in cost more than large pairs, such as Australian dollar and New Zealand dollar (AUD/NZD). The size of these spreads is frequently more.
At currency trade it isn’t necessary to have the currency account, instead the broker converts money into any basic currency to trade.
When receiving profit in trade on Forex, the broker converts any currency back into pounds and into the account.
During transaction the broker will demand to make it in the form of lot that means that it is possible to trade with a step of 1000, 10000 or 100 000 units.
What is leverage?
Leverage allows to get access to the large sums of currency without demanding too big capital.
One Pip is a very small unit of the movement and while Forex pairs are, as a rule, very changeable, they often move in rather small increments. For this reason traders have to trade in bulk, known as lots, or take advantage of leverage.
What is lot?
Standard lot is 100 000 units of currency. Sometimes it is possible to trade in mini-lots and micro-lots, worth 10 000 and 1000 units respectively, as an alternative .
It isn’t obligatory for certain traders to have 100 000 pounds, dollars or euro for each transaction, therefore many traders offer trade using borrowed funds.
Advantages of loan auction
Leverage allows to open a position without thinking of its overall cost. For example, only 0,5% of the total cost of a position must be paid to make it open for trade for EUR/GBP.
When closing a position profit or loss are based on the full size of the transaction. Though it gives chance to get higher profit, it also results in risk of the strengthened losses: including losses which can exceed deposits.
Advantages of Forex:
The Forex market is open 24 hours a day so it is possible to trade absolutely at any time.
Businessmen, traders, importers and exporters can use a wide range of the Forex market in personal interests, trading in different pairs of currencies. There are many options of the choice, a person can make bargains with pinpoint trade or future agreements. Thus, the Forex market gives many opportunities for trade, considering budget and risk factor to the investors.
The liquidity is an ability of an asset to be converted into cash quickly and without any price risk. In Forex it means that it is possible to invests large sums of money to currency and back with the minimum price movement.
Flexibility in trade
The foreign exchange market provides big flexibility to traders and business people concerning trade in goods and services. There are no restrictions for the amount of currency to be used for trade. Besides, there aren’t many rules for trader to follow in the market. It means that the market works at the round-the-clock basis without problems.
The technical analysis (indicators on charts) from other markets, such as actions is generally used.
here is no direct territorial binding. It is possible to trade from any point of the world even on vacation. The main thing is to have Internet connection and a notebook/tablet.
Profit during both “rises” and “collapses” of the markets
One of the most fascinating advantages in the Forex market is ability to get profit no matter the currency pair grows or falls.
Demo accounts are pretty widespread and available therefore it is possible to practice in the Forex market without losing the capital.
Here is an example of Forex work:
1. Rates of sale / purchase – 0.75443/0.75453 (1 pip-spread) for currency pair Australian dollar and US dollar (AUD/USD)
2. You want to buy one standard lot which is equal 100 000 units of basic currency
3. This transaction will cost 75 453 US dollars (0,75453 x 100 000)
4. You open the transaction with 1% of a margin, equal 754,53 US dollars (75 543 x 1%)
5. You decide to sell when the rate of counter currency reaches 0,75493
6. You multiply 0.75493 by your size of lot 100 000 and you receive $75 493
7. You subtract it from your cost of opening of lot (75 493 – 75 453 US dollars) to get profit in the amount of 40 US dollars.