The currency trading (Forex) market is the biggest and fastest growing market in the world. Its turnover is more than 5 trillion dollars/day. The partakers in the market are central and commercial banks, Corporations, institutional investors, hedge funds and private individuals.
Leverage is the Forex advantage
The ratio of investment to actual value is called leverage. Using a 1.000 USD to buy a forex contract with 100.000 USD value is leveraging at a 1:100 ratio. The 1.000 USD is all you invest and all your risk, but the gains you can make may be many times greater.
How does the Forex market work?
Basically, you need to buy low and sell high. It is not like the stock market where you buy physical shares. It is called CFD (Contract For Difference). In the forex market you can gain profit on ups and even on downs, if you have the right trade. Unlike the stock market, where if you buy high and the price drops then you have lost. However, please note that forex trading can be risky. In order to lower your risk you can visit our Trading menu under Risk Management. Keep in mind, do not risk what you cannot afford to lose.
How you can start trading?
You will need to choose a broker. Try out their demo platform and if your happy with the conditions you can register for Live account. Most of the brokers demo account have some delay compared to the Live account and that is absolutely normal. You can see what we recommend under the Brokers menu. If you open a live account with one of our recommended brokers we can offer our support regarding trading. Once your done with the testing you will need to upload your documents to the brokers database, as the regulated brokers will require KYC documents and they need to follow their regulators AML expectations. After that you will need to deposit your trading capital and start to trade.
Components of a forex trade:
-The currency pairs (which currency to buy, which currency to sell)
-The trade size (eg. 1 lot is equal with 100.000 EUR in case of EUR/USD)
-The market price (exchange rate between the two currencies)
Pairs as currencies are traded in pairs and exchanged one against the other when traded,
The rate at which they are exchanged is called the exchange rate.
Major currencies are: USD, EUR, JPY, GBP, CHF and AUD.
All currency pairs consist of two parts. Lets look at the EUR/USD pair as an example. The 1st currency (EUR) is called the base currency. The 2nd currency (USD) is called the quote currency. The exchange rate tells a buyer how much of the quote currency must be paid to obtain one unit of the base currency. The exchange rate also tells a seller how much is received in the quote currency when selling one unit of the base currency.
Once you make a trade there is an expense you need to know, which is called ‘Spread’.
The ‘Spread’ is the difference between BUY and SELL or BID and ASK.
Next word you need to know is Margin.
Margin is the amount of money required in your account in order to open a position. In finance, margin is collateral that the holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterpart.
How can you calculate your Margin requirement?
Size of 1 lot * number of lots / leverage as ratio
3 lots EUR/USD with 1:400 leverage
100.000(lot) * 3 (number of lots) / 400 (leverage) = 750EUR
If you would like to know more, please download or read online our e-book under the Education menu.
Thank you for your interest.