Hi Everyone !
Today, i have decided to write on briefly about 'Forex' system, and give you guys an overview of its strategies & scope of earnings. . .
So, lets get started with Introduction to Forex. . .
Intro & History :-
The word FOREX is derived from words 'FOREIGN EXCHANGE' and its also the largest financial market of the world.
An estimated figures tells that, This business generates US$ 4 Trillion Daily :p
aahhh.. It's really that big figures :)
Forex, unlike other financial markets, is not tied to an actual
stock exchange. Forex is an over-the-counter (OTC) or off-exchange
market.
The foreign exchange market is the mechanism by which currencies are
valued relative to one another, and exchanged. An individual or
institution buys one currency and sells another in a simultaneous
transaction. Currency trading always occurs in pairs where one currency
is sold for another and is represented in the following notation:
EUR/USD or CHF/YEN. The exchange rate is determined through the
interaction of market forces dealing with supply and demand.
Foreign Exchange Traders generate profits, or losses, by speculating
whether a currency will rise or fall in value in comparison to another
currency. A trader would buy the currency which is anticipated to gain
in value, or sell the currency which is anticipated to lose value
against another currency. The value of a currency, in the simplest
explanation, is a reflection of the condition of that country's economy
with respect to other major economies. The Forex market does not rely on
any one particular economy. Whether or not an economy is flourishing or
falling into a recession, a trader can earn money by either buying or
selling the currency. Reactive trading is the buying or selling of
currencies in response to economic or political events, while
speculative trading is based on a trader anticipating events.
Historically, Forex has been dominated by inter-world investment and
commercial banks, money portfolio managers, money brokers, large
corporations, and very few private traders. Lately this trend has
changed. With the advances in internet technology, plus the industry's
unique leveraging options, more and more individual traders are getting
involved in the market for the purposes of speculation. While other
reasons for participating in the market include facilitating commercial
transactions (whether it is an international corporation converting its
profits, or hedging against future price drops), speculation for profit
has become the most popular motive for Forex trading for both big and
small participants.
Who trades currencies, and why ?
Daily turnover in the world's currencies comes from two sources:
- Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.
- Speculation for profit (95%).
Most traders focus on the biggest, most liquid currency pairs. "The Majors"
include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc,
Canadian Dollar and Australian Dollar. In fact, more than 85% of daily
forex trading happens in the major currency pairs.
When and where are currencies traded?
Forex is open 24 hours a day, 5 days a week. It is up
to you when you want to trade – full-time from 9 to 5, part-time after
work, or once a day, before going to bed.
Unlike a stock market, the foreign exchange market has no physical
location. It is rather a decentralized electronic network of banks and
forex brokers.
Which currencies can be traded?
Forex currency symbols
consist of three letters. For example, USD stands for the US dollar,
EUR for the Euro, and JPY for the Japanese Yen. Some currencies are also
known under nicknames:
- American dollar (USD) = Greenback
- British pound (GBP) = Cable or Sterling
- Swiss franc (CHF) = Swissy
- Canadian dollar (CAD) = Loonie
- Australian dollar (AUD) = Aussie
- New Zealand dollar (NZD) = Kiwi
• The major Forex pairs and their nicknames:
Pip
Pip stands for “percentage in point” and it represents the
smallest change in price that a currency pair can make.
The smallest increment of price movement a
currency can make. Also called point or points. For example, 1 pip for
the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.
Leverage
Leverage is the ability to gear your
account into a position greater
than your total account margin. For
instance, if a trader has $1,000 of margin in his account and he opens a
$100,000 position, he leverages his account
by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of
margin in his account, his leverage is 200 times, or 200:1. Increasing
your leverage magnifies both gains and losses.
To calculate the leverage used, divide the total value of your open
positions by the total margin balance in your account. For example, if
you have $10,000 of margin in your account and you open one standard lot
of USD/JPY (100,000 units of the base currency) for $100,000, your
leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard
lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage
ratio is 15:1 ($150,000 / $10,000).
Now days Fx Brokers are offering leverage 1:50 to 1:1000 ect..
Margin
The deposit required to open or maintain a
position. Margin can be either “free” or “used”. Used margin is that
amount which is being used to maintain an open position, whereas free
margin is the amount available to open new positions. With a $1,000
margin balance in your account and a 1% margin requirement to open a
position, you can buy or sell a position worth up to a notional
$100,000. This allows a trader to leverage his account by up to 100
times or a leverage ratio of 100:1.
If a trader’s account falls below the minimum amount required to
maintain an open position, he will receive a “margin call” requiring him
to either add more money into his or her account or to close the open
position. Most brokers will automatically close a trade when the margin
balance falls below the amount required to keep it open. The amount
required to maintain an open position is dependent on the broker and
could be 50% of the original margin required to open the trade.
Spread
The difference between the sell quote and
the buy quote or the bid and offer price. For example, if EUR/USD quotes
read 1.3200/03, the spread is the difference between 1.3200 and 1.3203,
or 3 pips. In order to break even on a trade, a position must move in
the direction of the trade by an amount equal to the spread.
