What is Forex ? What does it mean ?
Forex is infact an acronym for the Forex Exchange Market. It is the most liquid trading market on the world where you can trade (“exchange”) one currency for another. As an example, suppose you think that the Euro currency will appreciate in value and you are holding US dollars: you may wish to exchange the dollars for the Euros. If you are right and the Euro appreciates in value in relationship to the US dollar, then you can close the position and make a profit.
This kind of exchange is carried out at the Spot Forex Market. There is not central exchange, but is instead a global market (“interbank”) which can be traded 24 hours per day, Sunday to Friday. From a trading point of view, you can speculate on Forex, through brokers like Alpari, Vantage FX, AvaFX and Plus500 FX.
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 are buying Euros and selling US Dollars. If you sell EUR/USD you are selling Euros and buying US Dollars.
When you enter a position, you can not trade other currency pairs unless you have additional funds on your account, but you can trade several currency pairs at the same time as long as you have enough margin/funds to trade. If you have never traded Forex before, you can see how all this works when you practice with a demo account.
Currency pairs are traded in pips. The profit or loss on a trade is dependent upon a few things, one of which is the number of pips you make or lose. A pip is the minimum unit that the price of a currency pair can move.
For example, in the case of the EUR/USD a pip is equal to 0.0001. If the price is at 1.2500 and it moves to 1.2501, it moved one pip. If it moves from 1.2500 to 1.2600 it moves 100 pips.
Another thing that determins how much you win or lose on a trade is Leverage If you trade at full leverage with a 100: 1 leverage account and you trade $1,000, if the market moves 50 pips in your favor, then you will make $500. This can happen within just a few minutes after you enter your order.
For example, let’s say that a broker allows you to trade at 100: 1 leverage. If you use all the leverage, for every dollar that you have on the account you can trade 100. Let’s say that you have $1,000. With $1,000 at 100: 1 you can trade $100,000 worth of dollars in exchange for other currencies. You are multiplying your trading potential a lot. This allows you to realize bigger profits, but you also incur in bigger risks.
LEVERAGE EXAMPLE
Your account has 100: 1 leverage and you trade at full leverage with $1,000. The EUR/USD pair (Euro/US Dollar) is trading at 1.2500.
So, you enter a LONG position on this pair. If the market moves in your favor by just one cent (1.2600), you will double your money and end up with $2,000 on the account. If the market moves against you by just one cent (1.2400), you will lose all the money that you have on the account or most of it depending on the broker you are trading with.
This can happens very quickly, unless you keep an eye on your positiond. If there is some particular news event the market can move this much in a matter of minutes, and has done so in recent times due to the problems in the Euro zone. This is what makes Forex very profitable, but also very volatile. Beginning traders get into Forex trading only thinking that the glass is half-full: they get attracted to Forex by all the hype and marketing, without appreciating that for every winning trader, there is a loser.
No other market in the world offer the opportunity to make money like this market does. Even the stockmarket takes second place to Forex, because most people can only profit if the stockmarket rises, whereas anyone can profit from successfully predicting the fall of a currency. But it is important for new traders to paper trade first before compromising actual money.
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