FOREX

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What is forex ?

The foreign exchange market, also known as the Forex or FX market, is by far the largest financial market in the world. To put things in perspective, it is more than 50 times larger than the New York Stock Exchange, with a daily turnover of more than $4 trillion.

Forex

 

Symbol Country Currency
USD ($) United States Dollar
EUR (€) Eurozone members Euro
JPY (¥) Japan Yen
GBP (£) Great Britain Pound
CHF Switzerland Franc
AUD Australia Dollar
NZD New Zealand Dollar

What is traded?

 The answer is money. It is exchanged among large central banks and organizations, investment companies and individual traders.

Actually, you have probably participated in Forex trading without even knowing it. Every time you take a trip to another county and exchange money, you contribute to that $4 trillion daily trade volume.

If taking a trip to the US, you would convert your base currency into US dollars. This effectively means that you would be buying dollars and, basically, a share in the US economy.

How to Trade Forex

Trading foreign exchange on the currency market, also called trading forex, can be a thrilling hobby and a great source of investment income. To put it into perspective, the securities market trades about $22.4 billion per day; the forex market trades about $5 trillion per day. You can make a lot of money without putting too much into your original investment, and predicting the direction of the market can be a real rush. You can trade forex online in multiple ways.

The MetaTrader platform is without doubt, the most popular retail FX trading platform. Many traders around the world use MetaTrader 4 as their preferred choice because of its

  • Ease of use and user friendliness
  • Ability to import custom indicators
  • Automation of trades using Expert Advisors
  • State of the art charting and scripting tools

Want to enter the world of FX but too worried about the losses? Don’t worry. Try out our demo accounts and practice trading till you are confident.If you’re new to forex, you’ll get hands-on forex training with no pressure to sign up. If you’re an experienced forex trader, you will be able to test your strategies in a risk-free long-term environment.

  • The type of currency you are spending, or getting rid of, is the base currency. The currency that you are purchasing is called quote currency. In forex trading, you sell 1 type of currency to purchase another type.
  • The exchange rate tells you how much you have to spend in quote currency to purchase base currency. For example, if you want to purchase some U.S. dollars using British pounds, you may see an exchange rate that looks like this: GBP/USD=1.6100 This rate means that you’ll spend 1.6100 dollars (one Dollar 61 Cents)for 1 British pound.
  • A long position means that you want to buy the base currency and sell the quote currency. For example USD/JPY, you would want to sell JPY (Japanese yen)against USD (US Dollars) .
  • A short position means that you want to buy quote currency and sell base currency. For Example USD/JPY In other words, you would spend sell USD and purchase JPY.
  • The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. The bid is the best price at which you are willing tosell your quote currency on the market.
  • The ask price, or the offer price, is the price at which your broker will sell base currency in exchange for quote currency. The ask price is the best available price at which you are willing to buy from the market.
  • A spread is the difference between the bid price and the ask price

You’ll see two numbers on a forex quote (Currency Pairs)

The bid price on the left and the ask price on the right.

  • Make predictions about the economy. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, then you probably want to sell dollars in exchange for a currency from a country where the economy is strong.
  • Look at a country’s trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money. This trading advantage will boost the country’s economy, thus boosting the value of its currency.
  • Consider politics. If a country is having an election, then the country’s currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value.
  • Read economic reports. Reports on a country’s GDP, for instance, or reports about other economic factors like employment and inflation, will have an effect on the value of the country’s currency.
  • A pip measures the change in value between 2 currencies. Usually, 1 pip equals 0.0001 of a change in value. For example, if your EUR/USD trade moves from 1.3120 to 1.3130, your currency value has increased by 10 pips.
  • Multiply the number of pips that your account has changed by the exchange rate.

You can try several different methods:

  • Technical analysis: Technical analysis involves reviewing charts or historical data to predict how the currency will move based on past events. You can usually obtain charts from Bulls Capital Markets MetaTrader 4.
  • Fundamental analysis: This type of analysis involves looking at a country’s economic fundamentals and using this information to influence your trading decisions.
  • Sentiment analysis: This kind of analysis is largely subjective. Essentially, you try to analyze the mood of the market to figure out if it’s „bearish” or „bullish.” While you can’t always put your finger on market sentiment, you can often make a good guess that can influence your trades.

Depending on your Deposit, you can take 2 to 3% margin for trades.

  • For example, if you want to trade 100,000 units at a margin of 1 percent, Margin will require you to put $1,000 cash in an account as security.
  • Your gains and losses will either add to the account or deduct from its value. For this reason, a good general rule is to invest only 2 to 3 percent to of your cash in a particular currency pair.

You can place different kinds of orders:

  • Market orders: With a market order, you instruct your broker to execute your buy/sell at the current market rate.
  • Limit orders: These orders instruct your broker to execute a trade at a specific price. For instance, you can buy currency when it reaches a certain price or sell currency if it lowers to a particular price.
  • Stop orders: A stop order is a choice to buy currency above the current market price (in anticipation that its value will increase) or to sell currency below the current market price to cut your losses.

Above all, don’t get emotional. The forex market is volatile, and you will see a lot of ups and downs. What matters is to continue doing your research and sticking with your strategy. Eventually, you will see profits

How to Make Money in Forex Trading

Forex market is so dynamic that you could see the change in price every second. So, in forex trading it is important to know how Traders make profit with this ever changing relative price of currency pairs.

To understand better let’s say that we place a buy order of a standard lot (1.0) in USD/CHF pair (In forex trading, currencies are always mentioned in pairs). That means we have bought 100,000 units of USD against CHF. Suppose you’ve a leverage of 1:100, the margin required for this particular trade will be $1000. With that, the value of 1 pip will be $10. In this scenario if the price goes up by 1 pip, the profit will be $10. For 2 pips $20, 3 pips $30 and so on till you liquidate the position.

Example 1

Consider an example: Buying price of USD/CHF pair is 0.9160 and closing price is 0.9170. That means you’ve gained 10 pips. So, for a standard lot of 1.0 the profit will be $100.The value of pip is not the same for all currency pairs. It depends on which currency pair you’re trading and thebase currency of that account
I.e. accounts currency. Let’s see an example of how the pip value is derived.

Example 2

E.g. let’s say that we’re trading EUR/USD and the current price is 1.3500 and the account currency is USD. As we know, a pip is the basic unit or the smallest increment in any currency pair. In EUR/USD a movement from 1.3500 to 1.3501 is one pip. So, a pip is 0.0001. Hence the calculation goes this way for standard lot 1.0,

(0.0001/1.3500)*100,000EUR = 7.4 EUR
But we want the pip value in USD since account currency is USD. Hence,
EUR 7.4*1.3500 = 10.00 USD

Example 3

Consider another example in USD/JPY. Say, the value of USD/JPY is 98.00 and account currency is USD. Here a pip is 0.01. For a standard lot,

(0.01/98.00)*100,000USD = 10.20 USD Since base currency itself is USD in the pair USD/JPY we directly get the value of pip in USD. Account currency in forex trading can vary with each individual. However, similar calculationapplies for all currency pairs.


How is Forex traded?

Forex exchange traders would typically look at the currencies available and buy the strongest currency while selling the weakest. So, for example, if after reading the news, you thought the euro was strong and the US dollar was weak, you could buy the euro while selling the dollar.

Because you are comparing one currency to another, Forex is always quoted in pairs. Therefore, an example of a EUR/USD quote would be 1.4650. This means that one euro is worth 1.4650 US dollars at that moment in time. If this rate fell to 1.4422, then this would mean the euro is getting weaker and the US dollar is getting stronger.

Within a Forex pair, the first currency is referred to as the base currency and the second currency is referred to as the quote currency. When you buy or sell a currency pair, you are performing an action on the base currency.

forex fx

The US dollar is by far the most traded currency in the world – with almost 85% of all reported transactions. The euro comes next, followed by the yen, and then the pound. For this reason the rates of all currencies against the dollar are referred to as major rates (USD/JPY) and the rest are cross rates (e.g. EUR/JPY).

Trading Platform

MetaTrader 4

This is a multi-faceted forex trading platform that is easily adaptable to the trader’s individual preferences and tastes.

  • Extensive Tecnical analysis
  • Expert Advisor
  • Multiple languages

MT4_trade_platform_

Fundamentals

Forex Fundamentals

In this article we will look at some examples to see how you can benefit from currency fluctuations. Firstly, let’s look at some of the terms associated with Forex trading.

forex fundamentals

What is a Pip?

Stock indices have „points”, however Forex currency pairs have pips.

In order to demonstrate how margin actually works, let’s find out what happens when you decide to open an account with Forex Broker.

change in the value of the currency pair by 0.0001 (and respectively 0.01 for currency pairs including the JPY) is a 1 pip of movement. For example, if GBP/USD was to move in price from 1.6339 to 1.6340, this would be a movement of 1 pip, and if it moved from 1.6339 to 1.6329, then this would be a movement of 10 pips.

The monetary value of one pip can vary according to the size of your trade and the base currency you are trading in.

Margin (or Leverage)

One of the advantages of Forex trading is that you can trade sums much larger than your account equity. This is known as margin trading. For example, a margin of 2% (or leverage of 1:50) allows you to open position worth $10,000 by having just $200 in your account ($200 : 2% = $10,000). This means that you can take advantage of the smallest price movements by controlling more money than is available in your account.

With Forex Broker you can leverage up to 200 times the size of your account equity. This means that if you have £1,000 in equity in your account, you can trade up to £200,000 worth of currency.

Although a leverage of 1:200 (a margin of 0.5%) may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading. If currencies fluctuated as much as equities, brokers would not be able to provide as much leverage.

While margin can be advantageous in increasing your profits, it can also significantly increase your losses, so it should be used with caution.

Lots

A lot is the standardised quantity of a financial instrument. It usually represents the minimum order size. With most Forex brokers, one standard lot is equal to 100,000 units of the base currency, but there are brokers offering trading in lots equal to 1,000 units (also known as micro-lots). Forex Brokers offers you the ability to trade micro-lots (1,000 units).

Before we confuse you any further, let’s see this in practice:

You have a trading account in euro and your account equity is €1,000.

As we have mentioned, traders can use leverage which gives them the ability to buy an amount significantly more than their account equity.

You hold the view that the euro will rise against the US dollar:

1. Opening the position – buying currency

You decide to buy 100 lots EUR/USD when our quote is 1.4422/1.4423.

This means that you are buying €100,000, and at the same time you are selling $144,230.00 (= €100,000 * 1.4423).

The value of your position is €100,000. To open the position, you need a deposit (or margin) in your account, which is a percentage of the value of the base currency.

  • if you have chosen to trade on a 1% margin, then the amount that will serve as collateral for your position will be €1,000 (= €100,000 * 1%).
  • if you have chosen to trade on a 0.5% margin, then the amount that will serve as collateral for your position will be €500 (= €100,000 * 0.5%).

If the currency of your account is USD, rather than EUR, than the collateral for the open position would be recalculated in the currency of the account:

  • if you are trading on a 1% margin, the collateral will be $1,442.30 (= €1,000 * 1.4423);
  • if you are trading on a 0.5% margin, the collateral will be $721.15 (= €500 * 1.4423);

2. Closing the position – selling the currency

When you close your position, you sell the base currency and at the same time you buy the quoted (second) currency of the currency pair. Because of this, the result of a Forex trade is always in the quoted (second) currency.

Let’s go back to our example, where several hours later the EUR/USD has risen to 1.4639/1.4640, so you decide to collect your profit.

Opening transaction (Buy): €100,000 (100 lots) х 1.4423 = $144,230.00
Closing transaction (Sell): €100,000 (100 lots) х 1.4639 = $146,390.00

Profit on trade: $2,160 ($146,390.00 – $144,230.00).

Since your account is in EUR, this means that your profit from the trade will be recalculated, and €1,475.51 (= $2,160 : 1.4639) will be added to your account.

Although the opportunity to earn significant profits by using leverage is substantial, leverage can also work against investors.

For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. To avoid such a catastrophe, Forex traders usually implement a strict trading style that includes the use of stop and limit orders. This will be detailed further in the coming articles.