This Forex post will introduce you to the basics of Forex trading or forex trading basics,what ever you call.In order to start understanding how Forex trading works ,we will be explaining to you the most important terms that you will need to know and we'll be using on a daily basis when trading Forex.But first let's see what for it stands for. Forex or Foreign Exchange trading is the activity where you can bet if one currency will get stronger or weaker relative to another currency. for example one Euro we can buy 1.39 US dollars.This exchange rate can change at any second. it is the banks which are continuously adjusting to the rhythms of supply and demand. that are responsible for this exchange fluctuation.so let's make a bet. let's bet that the Euro(EUR) will become stronger than the US dollar.In this case we buy a EUR/US dollar pair.Remember when we believe that one currency will rise against another,we buy the strong currency and we saw the week one.
since in most cases the sale of the currency will be handled by an outside brokerage firm all we have to do is buy the euro/us dollar pair.another way to say this is,that we will go along on the euro/us dollar pair.so when we go long on the euro/us dollar pair we bet that the Euro will rise against the US dollar.or if we go along on the US dollar euro pair. then we believe that the US dollar will become stronger than the euro.If we believe that the Euro will become weaker against the dollar,we can also sell the Euro against the dollar.Another way of saying this is that we will short the euro/us dollar pair.so when we short the euro/us dollar pair ,we are betting that the Euro will become weaker than the US dollar.
so let's consider a real life example. Right this second with one euro(1 EUR) I can buy one 1.3940 US dollars.
1EUR=1.2940 USD
if we go long on the euro/us dollar pair, then We bet that the Euro will go up against the US dollar.
now let's watch what happens
1EUR=1.3940 USD
1EUR=1.3941 USD
1EUR=1.3942 USD
1EUR=1.3944 USD
1EUR=1.3947USD
great,we were right. now with one euro, We can buy 1.3947 US dollars.let's quit betting and take our profit now. to figure out how much we just made,we first need to check how many euros we bet. so let's say for this bet We risked 10,000 euros(10,000EUR).Before We placed our bet five minutes ago,10,000 euros would have bought us 13,940 US dollars(13,940USD).But after our bet was finalized 10,000 euros bought us 13.947 us dollars.In just five minutes We made a profit of seven dollars as the euro gained seven pips against the dollar.
what's a pip in Forex ?
good question.one pip represents ,
1 PIP= 1% of 1%
or
0.0001
which is the smallest amount of currency fluctuation used by Forex, and it is the unit used to express the price change of an exchange rate. the brokerage firms want to help you make larger bets without you having to deposit the full amount of the bet.to understand how leverage works,let's assume that you believe that the Euro will become much stronger against the dollar.you were so sure about this that you would even bet a hundred thousand euros.but you can't afford it.no problem ,the brokerage firms will let you take this risk and lend you the hundred thousand euros.all they need from you is only one thousand euros as a collateral deposit.from the brokerage firms you can borrow a hundred ,two hundred or even four hundred times the amount of your initial collateral deposit .if you risk 1000 euros from your own money,you can place a bet between a thousand and four hundred thousand euros.it's up to you .if your cash in pocket is 1000 euros, and your bet is 1000 euros ,then you don't exercise a leverage or you can say that you exercise a leverage ratio of one to one .in case you want to bet fifty thousand euros with only one thousand euros.then you exercise the leverage of 50 to 1(50:1).
no they don't, they charge you according to the current interest rates.
a lot is an industry term used to describe the size of a bet.
a 1000 euro bet is a micro lot. a ten thousand euro bet is what we call a mini
lot. a 100,000 euro bet is what we call a standard lot.
1,000 EUR BET=micro LOT
10,000 EUR BET=mini LOT
100,000 EUR BET= std lot(standard LOT)
so ,for example if we go along on a mini lot of euro US dollar(EUR/USD)
that means we're betting an amount of 10,000 euros.remember the actual deposit that we need to make for this mini lot ,could be from one to four hundred times smaller depending on how much money we decide to borrow from our brokerage firm.
as you probably know if you have euros parked in your local bank account for one year,your bank will credit your account with a certain percentage of interest.however, what you may not know is that interest rates vary among different currencies.for instance the interest rate on your annual deposit in euros in a bank in Paris, might be 3.5%.where's your friend and Britain might be earning 5.5% on his deposit in pounds in London. in order to take advantage of the higher interest rates of the British pound you would probably sell your euros and by British pounds.however you would probably not be the only one.many individual investors and banks could do the same ,and if enough euros are traded for the pounds,the Euro will become weaker and the pound stronger has decreased demand for the euro drives its price down.
another reason why exchange rates move so fast may result from multi-billion dollar companies who need to convert the currency of large amounts of money .for example let's say Toyota the car manufacturer sold 1 million cars the United States. Toyota has been paid from the us importers 20 billion US dollars which gets deposited in a US dollar-denominated account in Japan .it's April and it's tax season for the Japanese residence. Toyota has to pay one trillion Japanese yen in taxes this year .that's close to 10 billion US dollars. this is a large amount even for Toyota in order to pay the Japanese government,Toyota will have to convert the 10 billion US dollars to Japanese yen. so Toyota goes into the Forex market and sells US dollars and buys Japanese yen.the demand for US dollars at this moment will naturally go down since 10 billion US dollars are being sold all at once.similarly the demand for Japanese yen goes up because somebody wants to buy one trillion Japanese yen. in this case the exchange rate between the euro and the Japanese yen could easily be effected.
a last example relates to the timing and circulation of market information.for instance let's say a financial report is published and shows instability in Europe .the unemployment rate has been going up lately and companies are beginning to report negative growth.this news will scare many banks prompting them to sell the euro and the Euro will decline against other currencies as a result. an important point to remember is this,typically the stronger the image of a country or a group of countries that represent the currency the stronger that currency becomes against others in the long run.
Thanks for reading this forex trading basics.feel free to share.
since in most cases the sale of the currency will be handled by an outside brokerage firm all we have to do is buy the euro/us dollar pair.another way to say this is,that we will go along on the euro/us dollar pair.so when we go long on the euro/us dollar pair we bet that the Euro will rise against the US dollar.or if we go along on the US dollar euro pair. then we believe that the US dollar will become stronger than the euro.If we believe that the Euro will become weaker against the dollar,we can also sell the Euro against the dollar.Another way of saying this is that we will short the euro/us dollar pair.so when we short the euro/us dollar pair ,we are betting that the Euro will become weaker than the US dollar.
so let's consider a real life example. Right this second with one euro(1 EUR) I can buy one 1.3940 US dollars.
1EUR=1.2940 USD
if we go long on the euro/us dollar pair, then We bet that the Euro will go up against the US dollar.
now let's watch what happens
1EUR=1.3940 USD
1EUR=1.3941 USD
1EUR=1.3942 USD
1EUR=1.3944 USD
1EUR=1.3947USD
great,we were right. now with one euro, We can buy 1.3947 US dollars.let's quit betting and take our profit now. to figure out how much we just made,we first need to check how many euros we bet. so let's say for this bet We risked 10,000 euros(10,000EUR).Before We placed our bet five minutes ago,10,000 euros would have bought us 13,940 US dollars(13,940USD).But after our bet was finalized 10,000 euros bought us 13.947 us dollars.In just five minutes We made a profit of seven dollars as the euro gained seven pips against the dollar.
what's a pip in Forex ?
good question.one pip represents ,
1 PIP= 1% of 1%
or
0.0001
which is the smallest amount of currency fluctuation used by Forex, and it is the unit used to express the price change of an exchange rate. the brokerage firms want to help you make larger bets without you having to deposit the full amount of the bet.to understand how leverage works,let's assume that you believe that the Euro will become much stronger against the dollar.you were so sure about this that you would even bet a hundred thousand euros.but you can't afford it.no problem ,the brokerage firms will let you take this risk and lend you the hundred thousand euros.all they need from you is only one thousand euros as a collateral deposit.from the brokerage firms you can borrow a hundred ,two hundred or even four hundred times the amount of your initial collateral deposit .if you risk 1000 euros from your own money,you can place a bet between a thousand and four hundred thousand euros.it's up to you .if your cash in pocket is 1000 euros, and your bet is 1000 euros ,then you don't exercise a leverage or you can say that you exercise a leverage ratio of one to one .in case you want to bet fifty thousand euros with only one thousand euros.then you exercise the leverage of 50 to 1(50:1).
now the big question is to the brokerage firms lend the money for free?
no they don't, they charge you according to the current interest rates.
a lot is an industry term used to describe the size of a bet.
a 1000 euro bet is a micro lot. a ten thousand euro bet is what we call a mini
lot. a 100,000 euro bet is what we call a standard lot.
1,000 EUR BET=micro LOT
10,000 EUR BET=mini LOT
100,000 EUR BET= std lot(standard LOT)
so ,for example if we go along on a mini lot of euro US dollar(EUR/USD)
that means we're betting an amount of 10,000 euros.remember the actual deposit that we need to make for this mini lot ,could be from one to four hundred times smaller depending on how much money we decide to borrow from our brokerage firm.
why do the exchange rates move so fast ?
as you probably know if you have euros parked in your local bank account for one year,your bank will credit your account with a certain percentage of interest.however, what you may not know is that interest rates vary among different currencies.for instance the interest rate on your annual deposit in euros in a bank in Paris, might be 3.5%.where's your friend and Britain might be earning 5.5% on his deposit in pounds in London. in order to take advantage of the higher interest rates of the British pound you would probably sell your euros and by British pounds.however you would probably not be the only one.many individual investors and banks could do the same ,and if enough euros are traded for the pounds,the Euro will become weaker and the pound stronger has decreased demand for the euro drives its price down.
another reason why exchange rates move so fast may result from multi-billion dollar companies who need to convert the currency of large amounts of money .for example let's say Toyota the car manufacturer sold 1 million cars the United States. Toyota has been paid from the us importers 20 billion US dollars which gets deposited in a US dollar-denominated account in Japan .it's April and it's tax season for the Japanese residence. Toyota has to pay one trillion Japanese yen in taxes this year .that's close to 10 billion US dollars. this is a large amount even for Toyota in order to pay the Japanese government,Toyota will have to convert the 10 billion US dollars to Japanese yen. so Toyota goes into the Forex market and sells US dollars and buys Japanese yen.the demand for US dollars at this moment will naturally go down since 10 billion US dollars are being sold all at once.similarly the demand for Japanese yen goes up because somebody wants to buy one trillion Japanese yen. in this case the exchange rate between the euro and the Japanese yen could easily be effected.
a last example relates to the timing and circulation of market information.for instance let's say a financial report is published and shows instability in Europe .the unemployment rate has been going up lately and companies are beginning to report negative growth.this news will scare many banks prompting them to sell the euro and the Euro will decline against other currencies as a result. an important point to remember is this,typically the stronger the image of a country or a group of countries that represent the currency the stronger that currency becomes against others in the long run.
Thanks for reading this forex trading basics.feel free to share.
