This is a set of articles about The Foreign Exchange Market. Here, you will learn what Forex is, how it works, and how profitable it can be. The whole set of articles includes the following:
What's Forex?
- Money management
- Analysis of technology
- Fundamental analysis
- Interest that builds up
What's Forex?
Forex is an abbreviation for "The Foreign Exchange Market." This is the world's busiest market for trading or exchanging one currency for another. For instance, if you think the value of the Euro will go up and you have US dollars, you could trade the dollars for Euros. If you're right and the Euro goes up in value compared to the dollar, you can close your position and make a profit.
The Spot Forex Market is based on this main idea. Since this is an interbank system, it is not centralised. There is no one place where currencies can be bought and sold. It's a worldwide market. Online Forex trading is possible 24 hours a day, 6 days a week.
This market started up at the start of the 1970s. The reason was that gold was no longer used to back up money. They began to float on their own. Their value was based on economic factors, speculation, and other things like supply and demand. This is where the Forex Market came from.
As I said above, you can trade Forex on the Internet. Many brokers, like www.oanda.com, let you start trading online with as little as $300 to $500 to open an account. You can also start by opening a demo account and trading with fake money to "test the waters" and see if you like this market.
Most brokers don't charge you for a demo account. Some brokers offer demo accounts that last for 30 days, while others have accounts that never end. When you trade on paper, you can try out different strategies and see if they work.
Forex trading is risky, but it can also bring in a lot of money. You can trade at any leverage between 20:1 and 400:1. This means that the broker will let you trade with more money than is in your account.
Let's say, for example, that a broker lets you trade at 100:1 leverage. If you use all the leverage, you can trade $100 for every $1 you have in your account. Let's say you have $1,000 to spend. At 100:1, you can trade $100,000 worth of dollars for other currencies with $1,000. You trade a lot more than you could before. This lets you make more money, but it also makes your risks bigger.
I'll show you what I mean. Let's say you have 100:1 leverage on your account and trade with $1,000 at full leverage. The exchange rate between the Euro and the US Dollar is 1.2500. So, you place a bet on this pair.
Let’s say that you are long. If the market moves in your favour by just one cent (1.2600), you will double your money and have $2,000 in your account. If the market moves against you by just one cent (1.2400), you will lose all or most of the money in your account, depending on which broker you use.
This can happen in a very short time. This much change can happen in minutes or hours on the market. Because of this, Forex is both very profitable and very risky. I don't know if new traders can grasp how important what I'm saying here is. A lot of people get into Forex trading without knowing the whole story. All the buzz around this market makes them want to buy into it.
I do think that this market is the only place in the world where you can make money like this. On the other hand, it comes with some risks. Before risking real money, new traders should try trading on paper first. By doing, we learn. Before I started trading with a demo account, I didn't know much about the basics of this market.
Now, I'll talk about some other important details. On the Spot Forex Market, currencies are bought and sold in pairs. When you open a position, you trade one currency for another. If you buy EUR/USD, for example, you buy Euros and sell US Dollars. If you sell EUR/USD, you buy US dollars and sell Euros.
When you open a position, you can't trade other currency pairs unless you have more money in your account. However, 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 use a demo account to see how everything works.
You might also want to know that pips are used to trade in Forex. Many things affect how much money you make on each trade. Pips are one of these things. Another is how much leverage you are using in each trade. A pip is the smallest amount that a currency pair's price can move.
In the case of the EUR/USD, for example, a pip is equal to 0.0001. When the price goes from 1.2500 to 1.2501, that is one pip. Like in the example above, if it goes from 1.2500 to 1.2600, it moves 100 pips.
Now, how much you make on each trade depends on how many pips you make and how much money you put into that trade. Also, how much does that account have? If you have a 100:1 leverage account and trade $1,000 at full leverage, and the market moves in your favour by 50 pips, you will make $500. This can happen just a few minutes after you put in your order.
Most traders with a lot of experience wouldn't tell you to trade this way, though. Because if the market goes against you, you could lose everything in a matter of minutes. It's better to set smaller profit goals for each trade and let your profits grow over time.
The basic rule of money management is that you shouldn't risk more than 1% to 3% of your capital, especially if you are a new trader. I'll go into more detail about this in another article in this series.
Well, I hope you've learned something from this. This was a brief overview of the Forex Market. In my other articles, you can read more about Forex.
EasyWebRiches was made in 2006.
