What is forex? In plain english!
Forex is actually the beginning of the words Foreign Exchange joined together. In effect when someone says forex, they are refering to the Foreign Exchange Market.
So what is the Foreign Exchange Market then?
The Foreign Exchange Market is the largest market in the world, it is where all international currencies are traded over the entire planet, so as you can imagine it is huge. How big? Well try over $3 trillion every day, that’s $3000000000000 every single day. The reason this is so ridiculously large is that a lot of money can go into the market then come back out again several times a day as large companies make many trades to try to maximise their profits.
Foreign Exchange? Like a bureau de change?
Kinda, when you go on holidays, you have to get local currency from a change office. When you trade forex you dont actually get any cash in whichever currency you have bought, instead when you trade currency you open what is called a position which remains open for as long as you wish to ‘hold on’ to whichever currency you have bought. When you want to sell that foreign currency you must ‘close’ your position and any profit you have made shows up as your home currency in your account. If you’ve used these change offices before you may have noticed that they have two prices for each currency, these are a buy price and a sell price, which will be examined more closely in the next section of this guide.
So how do you make money off it?
The best bit! with Forex markets, it is always possible to make money. Unlike stock markets, housing markets and all the other markets that can, as we have recently seen, crash, on Forex markets if one currency is going down against another, you can be making profit. The entire market cant crash, because is based on what currencies are worth compared to other currencies, so when one is going down, its the same as another going up.
How does that work?
Well, lets say you had 100 US dollars(US$100) and you thought the dollar was going to go down against the euro, so you bought euros with your dollars. If the exchange rate between dollars and euros was 0.75 you would get 75 euro cents per dollar. So now you have €75. Now just say you were right! The dollar went down! This would mean the the exchange rate would go down, lets say to .65, meaning one dollar was worth 65 euro cents. This is great news for you, because you bought euros, so if you swapped back your €75 to US dollars you would now have US$115.38. All you have done is move your money from one currency to another and back, and you have made a profit.
Thats it? sounds easy
It literally is that easy, there are a few things to take into account, such as commission you must pay to your broker(choose your broker carefully!) and something called “pip spread” which will be explained in the next edition of this guide, but there you have the basics of forex.In the next part, as well as talking about pip spreads, I’ll introduce you to the tool which can really crank up your profits on forex markets, margins. Margins are what make forex trading the exciting money making venture that it is, so stay tuned!
What the hell is a Forex pip?
Well, when you look at forex charts, you see that each currency pair has two sets of numbers, a pip is the last digit of each number, so if a price changes from 0.870 to 0.873 it has moved 3 pips. The pip spread is the gap between each number, for example 0.910/0.915 has a 5 pip spread. This is important stuff, because what you want is lower pips, the lower pip, the easier it is for you to profit.
Why is that?
Well, when you start a trade, you always open at the ‘worse’ position and therefore you must cover the pip spread before you start making profit. If the pip spread is too large its hard to profit even if you get the direction of the trade right, so always look for a broker with good spreads.
Ok, so maybe i can make a little profit, but i dont have enough money to make any serious cash
This situation may seem familiar, its that old adage(or is it myth?) that it takes money to make money. In forex there is a little twist to this, you can use someone elses money but keep all the profits. Nothing illegal or bad, its called margins, and essentially what works is you use your money to cover the margin of a trade. As an example, if you had $100 and traded with a margin of 50:1, you would be able to open trades worth $5000. if you did this and the pair you were trading improved by 1%, you would be $50 up(before commision), but then your next trade you can open $7500, another 1% and thats $75 for you. If you are good at picking what will happen between a currency pair, you can quickly build your capital trading like this, however there is a catch, this is the real world and money can be lost. When trading margins your risks go up with your rewards so always be careful that your not risking to much, becasue just as you can make fast profits with margin trading, you can also lose it carefully.
What are the best lessions to take in other to beginning forex trading?