What is Forex?

What is Forex

Forex is the Global Currency Market

What is forex?

I wrote this to help traders that are new to Forex trading.  Forex is a term which is a short form for foreign exchange. This is the action of trading the currencies of one country with that of another for different reasons such as commerce or tourism. Since some businesses are conducted on a global platform, there is a need for transacting with the currencies of other countries. One other major reason for trading currency is speculation with the purpose of making money, which is the entire purpose of this website.

After the 1991 Bretton Woods accord, currencies were allowed to float in a free manner against one another and this led to a varying of the individual currencies’ values. This is what led to the need for services in foreign exchange. The service is usually carried out by investment and commercial banks on behalf of their clients and has provided an environment that is speculative for trading one currency against the other on the internet.

Forex as a hedge

Commercial enterprises that carry out trading in foreign countries are placed at a high risk as a result of the fluctuation in the values of currencies whenever they have to buy or sell to or from another country. It is for this reason that the foreign exchange markets offer a way of hedging the risk. They fix a rate at which a transaction will be concluded at a future date. In order to accomplish this, the trader can sell or buy currencies in the swap or forward markets. At this time, the bank fixes a rate making it possible for the trader to know the exact exchange rate and thus hedge the business against a loss as a result of the exchange rate.

Forex for speculation?

Due to the constant fluctuations between different currency values of different countries as a result of the varying demand and supply factors such as trade flows, interest rates and economic strengths, an opportunity arises for entrepreneurs to bet against the changing values of different currencies. The traders buy or sell one currency against the other with the hope that the one they buy gains strength or the one they sell weakens.

Forex trading strategies

Forex trading techniques and strategies as well as the market are quite unique. There is no opening or closing gap as it does not sleep. The strategies are not only highly liquid but also hard to influence. The market has no commission and the regulations are few if at all they are any. Not only is the Forex exchange intimidating but it is also the biggest market. However, where there is a trading system that is good, an approach that is disciplined and a learning willingness, the Forex market can be a lucrative place to trade in.

It is recommended that for traders who have small accounts, usually below $25,000, they should trade according to the trend. A good strategy that traders can use is to go for those trades that are unpredictable and can therefore, go in any direction. Even though this can also be unreliable, trading in the trend’s direction, can easily improve your odds in the long term.

Another good Forex trading strategy to improve the odds is to have more than one account. You can have a demo account and a real account. This will ensure that you will continue learning even as you trade with real dollars. Use the demo account to test the alternative trades that you might be thinking of. Where you have enough money, you can try trading in 2 or even 3 lots rather than 1. This can be safer when compared to trading with one lot.

While choosing a strategy for Forex trading, it is important to take time to look at the daily chart. Having this knowledge in your fingertips can work to your advantage. Ensure that you carefully consider the big five currencies before taking a position on one of them. These are euro/dollar, dollar/yen, euro/yen, Swiss franc/dollar and dollar/pound. Check out those obvious things that you would not like to miss.

Avoid keeping count of the profits in the first twenty trades. Instead, keep track of the winning percentage. After you are sure that you can pick a direction, you can have your profits increased by making use of multiple trading positions and also using some variations in the stop loss.  After this, you should be able to fine tune the system and begin to realize some substantial profits.

What is Forex Leverage?
Forex leverage is an amount of money that is provided to investors and traders by the Forex broker . It can therefore be referred to as a loan that is given to investors by the brokers who are handling their accounts. In most cases, the investor gets a leverage of 50:1, 100:1 or 200:1. The ratio is dependent on your broker and the position’s size. The standard trading is 100,000 units of currency. In this case, you can get a leverage of 100:1 or 50:1. The 200; 1 leverage is only given to those accounts that are below $50,000.

Advantages of leverage

One of the reasons why people prefer investing in the Forex market is the high leverage. Also with just some little money, you can make profits using the broker’s money. For instance, where the broker gives you a leverage of 400:1,it is possible to double your account with a movement of 0.25% in the right direction. In such leverage, you are allowed to trade up to 400 times, the amount that is in the account.

Disadvantages of leverage

It is important to note that, leverage can also work against you. Just like you are able to double your account in a single day, it is also possible to wipe it out with a 0.25% movement in the opposite direction. Most investors forget this when they overuse it.

What is Forex margin?

In order to be allowed to trade with forex leverage you will also be required to commit a particular amount of money. This is what is called the ‘good faith deposit’. The amount is usually a percentage of your current position. For instance, where you intend to take a $100,000 position, you will be required to invest about $1000.00 This can be referred to as a 1% margin. It is important for you to know how to use Forex leverage to your advantage.

 

 

The following two tabs change content below.
Casey Stubbs is the founder of Winners Edge Trading, which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.

Winner’s Edge Trading, as seen on:

Winner's Edge Trading in the news

  • Thanks for the correction, yes we have changed it.

  • dale jhonson

    Great article for beginners.

  • Akhtar Ajmeri

    Sir, In What is Forex margin? For instance , where you intend to take a $100,000 position, you will be required to invest about $100,000 should read $1,000. Kindly confirm that it is an error and have it corrected for readers in the future.
    Thanks,