What is Forex?
Forex is a commonly used abbreviation for “foreign exchange,” and it is typically used to describe trading in the foreign exchange market by investors and speculators.
Technically, FOREX or Foreign Exchange Market is a global market that is decentralized for the currencies trading. Large volume of trading is done through various participants in the market that majorly comprises of larger international banks, financial centres, and different types of buyers and sellers.
To make your understanding simple, imagine you are going for a trip to New York. To prepare yourself financially you exchange 500 Euros to dollars. A week later, you learn your trip has been cancelled so you decide to change back your dollars to Euros. To your surprise, you end up with 505 Euros, making an additional profit of 5 Euros.
This is known as a profitable foreign exchange trade. You initially purchase Dollars or any other currency at a certain rate. During the next week or near future, the value of that currency goes up against the value of your currency (in this case Euro). Without even meaning to you incur some profits as you brought the dollars at a lower rate and sold them when the rates where high.
What is Traded in Forex Market ?
FOREX trading essentially comprises of the trade of commodities, currencies, metals, indices, stocks, energy and many more. Start trading today!
What am I doing when I trade Forex?
For example, Let us assume a situation where the US Dollar is expected to weaken in its relative value to the Euro. As a FOREX trader, you in this situation will sell dollars and buy Euros. If the Euro value strengthens, the purchasing power to buy dollars will increase by now. As a trader, you can now buy back more dollars, making a profit.
This form of trading is just like stock trading. In stock trading, a traders buys a stock and when they see a rise in the price of this stock sell it. An online FOREX broker or trader will buy a currency pair, exchange it when there is a chance of rise in future, and sell a currency pair if they expect the exchange rate to fall.
What is an Exchange Rate?
FOREX is a globally decentralized market that determines the relative values of currencies. There are no centralized depositories where transactions can be conducted. All transactions of this market are dealt by several market participants located in different areas. It is rare that any of the currencies will be similar in their value; it is also rare that any two currencies will maintain the same value for more than a short period of time. The exchange rate between two variable currencies changes constantly in this market.
For example, on January 3, 2011, one euro was worth about $1.33. By May 3, 2011, one euro was worth about $1.48. The euro increased in value by about 10% relative to the U.S. dollar during this time.
What is Currency Pair ?
A currency pair is the quotation and pricing structure of currencies that are traded in the FOREX market. The value of a currency is determined by comparing it with another currency. The first currency is known as the “base currency” while the second currency to which the first is compared is known as the “quote currency”.
All currencies are assigned an ISO or International Standards Organization code abbreviation. This code is used to convey the particular currencies that make a currency pair. These ISO codes help in all Indices CFDs. For example, USD/JPY indicates two currencies: the U.S. Dollar and the Japanese Yen.
A speculating trader buys a currency pair if he believes the base currency will increase with respect to the quote currency, or that the corresponding exchange rate will rise. Similarly, a speculating trader sells a currency pair with the hope that the base currency will decrease in value compared to the quote currency or the quote currency will increase with regards to the base currency.
Margin and Leverage
The concept of margin trading
One of the primary advantages of trading with FOREX markets is that all transactions are traded with a margin. This implies that small amount of money invested by a person can give him exposure to a much larger trading position. So the possibility of making large profits with very less stake and more Return Of Investments can be expected. This process of work is known as leverage.
Leverage (also known as gearing)
The concept of leverage, i.e. the use of debt to increase the expected return on your capital outlay has a specific advantage of depositing less to gain greater exposure to a market than if you were to make a purchase in your market through a stockbroker or any other share-dealing service. Despite a small percentage of the value of trade that is required, the investors still realize loss or profit equivalent to complete trade size. Larger volume trades allow investors to take advantage of small price movements.