The fundamentals of Forex

Under this barbarous term hides the abbreviation of "Foreign exchange" (For-Ex), which refers to the foreign exchange market, or "exchange of currency" to be simpler.

We all have to deal with Forex roundabout way when traveling abroad, exchanging currency, and also all noticed that the rates fluctuate. And it is these variations that forex traders take advantage.

Forex is the place to exchange virtual currency, whose value fluctuates constantly, 5 to 7 days and 24 hours on 24 (forex is indeed the only market in the world to be open 24 hours on 24 and it is possible to make trading operations at night).

Basic vocabulary and basic concepts

Before turning to the forex trading itself, and techniques that will enable you to conduct successful operations, it should master the general functioning of the market, understand the specifics, and to become familiar with the vocabulary used.

We will review here the key terms used by forex traders, by explaining in detail the basic but essential concepts.

Currencies are traded in "pairs"

Unlike other financial assets, currencies are traded in pairs. It is always the value of a currency expressed in another currency.

The consequences

Therefore we bought or sell a currency pair, it comes back to bet on the rise of a currency, but also simultaneously down another currency.

Example

When you buy the EUR / USD, you bet on the rise of the euro against the dollar, which means that we also bet on the dollar's decline against the euro. The motivation to buy the EUR / USD may therefore result either from a bullish view on the Euro, or a bearish view on the dollar .
Conversely, when you sell the EUR / USD, you bet on a fall in the euro against the dollar, which implies that we also bet on the rise of the dollar against the euro.The motivation to sell EUR / USD may therefore result is a downward view on the euro or a bull opinion on the dollar .

The selling

We just talked to "sell" the EUR / USD, which implies certainly some of you need to have previously purchased. This is however not the case. On the forex, it is possible to take a short position on a currency pair, without "in stock" this currency pair.

This mechanism is known in the equity markets under the name "short sale". It is actually a "game of commitment." Taking a short position, you agree to "provide" a currency pair during the time of your position, when you want to close the position.Therefore, if you take a short position on EUR / USD at 1.20, and you at the Fence 1.10, this amounts to 1.10 to buy what you have previously agreed to sell to 1.20, the difference constituting your benefit.

The pips and lots

Forex traders calculate changes in "pips" , and not percentages, and currencies are bought by "lots" .

1 pip is equal to the last decimal place of a currency trading

Example

EUR / USD rose from 1.2750 to 1.2800, said it has won "50 pips"

This method of calculus of variations is uniquely affect the forex as in percentages, currency fluctuations are difficult to read due to their low nominal volatility.

For example, when the euro rose from 1.2545 to 1.2565, the variation is only 0.16%(up 20 pips).

You should also remember that currencies are bought in batches. Most brokers offer lots of different sizes, ranging from 1000 (micro lot) to 100,000 units (standard lot).

It is also easier to calculate profits and losses with pips, because the value of 1 pip depending on the size of the lot on which trading operations are carried out we know.

Example: EUR / USD

• -Lot 1000 Units: 1 pip = $ 0.1
• 10000-Lot of units: 1 pip = 1 USD
• -Lot of 100000 units: 1 pip = 10 USD

So when we won 20 pips with a lot of trade unit 1000, we won two dollar, 20 dollars with a lot of 10,000 units and $ 200 with a batch of 100,000 units.

The concept of leverage

We have seen that the minimum lot about forex are lots of 1000 units, or $ 1,000 with respect to the EUR / USD, which implies probably some of you that the minimum investment in the Forex is 1000 dollars. There is nothing.

Indeed, it is there that the famous "leverage" that everyone is talking about.

Simply put, leverage allows you to have more money to invest in the forex than you have in your account.

For example, a leverage of 100 means that you can invest in amounts 100 times greater than what you have deposited to your trading account. With $ 1,000, so you can invest an amount of $ 100,000, if you have a leverage of 100.

It is indeed here that is one of the main advantages of Forex, and it is thanks to the leverage that Forex is a market that can (on paper) make you rich overnight, even with a minimal initial investment (extremely rare in reality, but theoretically possible).

It is also due to the effect of very high leverage offered by forex as it is considered a highly speculative market and very risky for the uninitiated.

Example

Account credited with $ 1,000 and a leverage of 100 (brokers usually offer 50 to 500), you can invest an amount of $ 100,000 ($ 1,000 X 100 lever).

The margin

The margin is the amount to "mobilize" to perform an operation. Basically, it is the amount of your lot, divided by the leverage.

Example

When you buy a lot of $ 1000 with a leverage of 100, you will mobilize only $ 10. In other words, you mobilize the hundredth the size of your operation ($ 100/100 lever). These 10 dollars used are called the "margin".

The impact of leverage on earnings and performance

A little calculation will be speaking:

• Buying a lot of 10,000 units when EUR / USD at 1.3000
• Leverage 100
• Capital mobilized: 10000/100 = $ 100 (you must have at least $ 100 in your account to take this position.)
• If EUR / USD rose from 1.3000 to 1.3100 (current change in a day), the gain is 100 pips
• $ 1 X 100 pips (1 pip value on a lot of USD 10,000 units EUR /) = $ 100

Having actually invests $ 100, the final gain is $ 100, which is a performance of 100% compared to your actual investment (the mobilized margin).

Knowing that Forex is a highly volatile market, and it is common to see daily changes of more than 100 pips, you soon realize that the gains can pile up at an extraordinary rate (as losses elsewhere ... ).

The spread

Listing (the current price) of a currency pair at a specific time differs depending on the nature of the transaction: Purchase or sale.

Screen Platform

The difference between the purchase price (Ask) and the sale price (Bid) is called the spread.
In this example, so we say that the spread of the EUR / USD is 3 pips .
In practice, this means if you purchase a pass , then End the position immediately,you lose 3 pips , and if you spend a sale and Fence immediately.
This also means that in the context of a purchase, your position starts to be beneficial after an increase of 3 pips (and after dropping three pips if you decided to sell.)
This difference is called the spread , is pay your broker.

Most brokers offer spreads from January to March pips on EUR / USD. Also note that the spreads can be fixed (in the "market makers", sometimes criticized by experts) orvariable (brokers "No Dealing Desk", considered more reliable)

Although some of these concepts are found in other markets, it is understood that the Forex has its own characteristics, which are all benefits. This may impress the uninitiated, but we made it very quickly, and if all traders apprentices not forcings become good traders manage all quickly understand and master these concepts, the vocabulary and the operation.