WHAT IS FOREX? Forex is short for Foreign Exchange: the exchange market. Over this virtual market the currencies of all the countries in the world are purchased and sold in real time. It is the biggest financial place worldwide where over 3.2 billion USD are exchanged daily! In Forex the value of the different currencies fluctuate permanently, 24/24. Therefore the investors may exchange the selected currency against a different one to get a profit. In order to speculate in Forex, you just need to forecast which the currency whose value will rise within a given time is or, in other words, speculate on the fluctuations and variations of the exchange rates between two pairs of currencies. Specifically, what you should you do to trade with Forex? You become a Forex trader when you buy or sell a currency X in exchange for a currency Y. The pair EUR/USD, the pair USD/CHF, the pair GBP/USD and the pair USD/JPY are the most widely exchanged in the Forex market. Nonetheless, there is a wide selection of currencies to exchange in the foreign exchange market. The essential information of the Forex trader is: The basic currency: the name given to the first currency listed. Generally is the American dollar. Indeed, the traders generally select to speculate on variations of the exchange rate between the dollar and another currency such as the yen or the euro. The basic unit: Knowing that initially the American dollar is considered the basic currency, the term “exchange rate USD/JPY 2.36″ should be understood as follows: 1 American dollar is equivalent to 2.36 Japanese yen. If the exchange rate is going up, when the dollar is the basic unit, this means that the rate of the American dollar is rising and therefore, the rate of the other currency is falling. Similarly, to speak on the rise of the euro with regard to the dollar, it is necessary to buy EUR/USD, speak on the rise of the euro with regard to the dollar, which will be falling. What is a PIP? Is the unit in which the different variations of the pairs of currencies are measured. This unit is used when trading in Forex because it simplifies the reading of the variations than when expressed in percentage. What is the leverage effect? The leverage effect is a financial manipulation with which it is possible to trade in Forex with small sums. The minimum lots in the Forex market are 1,000 dollars. A leverage effect of 100 allows you to invest on amounts for a value 100 times higher than the amount at your disposal in your trading account and therefore increase your profits. What is the impact on the performance? If you purchase a lot of 2,000 dollars when the pair EUR/USD is 1,3000 and you benefit of a leverage effect equal to 100, you have invested: the amount of 2000/100 = 20 dollars. If the pair EUR/USD varies from 1,3000 to 1,3100 in one day, the gain is 100 pips, therefore: 100 pips x 20 cents (value of 1 pip on a lot of 2000 dollars) = 20 dollars. You have therefore invested the amount of 20 dollars and gained 20 dollars more. You had a +100% performance in your initial operation! The more variations in the currency values, the greater the benefits. What is a spread? The spread of a pair of currencies corresponds to the difference between Ask and the Bid, that is, between the purchase and the sale price of these currencies. The quotation of a pair of currencies in a T time is different, based on the direction of the operation: whether it is a purchase or a sale. For example, if the pair EUR/USD has a value of 1,2535 for purchase and 1,2534 for sale, this means that the spread of this pair of currencies is equal to 2 pips. This means that if you pass a purchase order, your position may benefit already following a rise of 2 pips or with a fall of 2 pips, if your order is for sale. The spread is the part that your Forex broker receives as commission. Therefore pay attention not to trade with those that propose spreads exceeding 2 or 3 pips on the pair EUR/USD
Posted on: Tue, 26 Aug 2014 10:11:44 +0000
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