The foreign exchange market is an international market where you can buy and sell currencies. It is the largest financial market in the world, and is also known as foreign currency exchange, interbank market, Forex or Fx.
The foreign exchange market helps businesses and investors to convert one currency into another . At the most basic level, we all participate in it when we travel abroad and sell our local currency to get the cash for the currency you need to spend abroad.
Besides being operated by individuals and companies , currencies are important for financial institutions , central banks and governments. Facilitates negotiations and international investments by enabling businesses to capitalize on a currency to pay for goods and services in another.
The Foreign Exhange Market (FX) is easy accessible for everyone. You don’t have to be a financial genius to take advantage of the continous moving markets. Neither do you have to be a millionaire to invest in Forex.
The profitability of the Forex market is expressed in a great number of ways, and it is certainly with a reason, the biggest market in the world related to trading volume. Most the operations are performed intraday (opening and closing a position during the same day).
Unlike most financial markets, the Forex market allows you to start trading with relatively low initial capital.
You may ask yourself: "What are my chances to make profit with a low initial investment?"
The Forex market does not require large initial investments, as it allows you to invest with leverage.
Trading leveraged investments allows you to open positions for tens of thousands of dollars while investing small sums of money (margin). This means that by investing in Forex you have a profit (and loss) potential of tens and even hundreds percent per day .
What is also unique in the Forex market is that any movement and/or financial notice is an opportunity to invest. If a currency goes downward or upward, there is always room for speculation and you always have the option to buy or sell the currency of your choice. Unlike the stock market, Forex is not limited to only speculation on a rising market; a falling (bearrish) market can be an even so good investment as a bull market.
Forex trading is always done in pairs since any transaction involves the simultaneous buying of one currency and selling another . Investments revolve around 14 major currency pairs.
Always remember that the Forex market can be very profitable but, like any financial instrument, it also contains risks. You must be aware of this risk and not invest more money than you can afford to lose.
THE MAIN ATTRACTIONS OF THE FOREX MARKET:
Accessibility - The Forex market is a continuously available 24 hours a day market with a daily trading volume 50 times greater than in traded NYSE volume , there are always “runners” and "dealers" (agents) willing to buy or sell currencies on the forex markets. No wonder that the Forex market has a trading volume of over 3 trillion a day.
24 hours Market - The Forex market is open 24 hours a day (open on Sundays at 14:00 New York time until Friday at 16:00 New York time) so it is posible to enter the market whenever you see a good oportunity (for example due too interesting financial news). There is no need to wait for the opening bell of the classic Stock Exhange. By having the ability to operate during the trading hours of the U.S., Asian and European markets traders have the advantage to react immediately to market news and determine their own hours of operation.
Reduced Focus - Unlike the smaller stock market with tens of thousands of stocks to choose from, the forex market revolves around more or less eight major currencies. A narrow choice means no room for confusion. So even if the market is huge it is very easy to get a clear picture of what is going on.
Liquidity - The foreign exchange market or Forex is the world's largest financial market with a daily turnover of over $ 3 billion. Beside this fact being an attractive statistic, the great mass reach of the Forex market is also one of its biggest advantages . The huge volume of daily transactions makes it the most liquid market in the world, which means that under normal market conditions you can buy and sell currencies as you like and at any time. You can always perform the desired transaction. This liquidity, especially the market of major currencies, helps ensure price stability. Traders can almost always open or close a position at a correct market price . This is a great advantage of the currency market in comparison with other financial markets.
The market can not be cornered - The colossal size of the Forex market also ensures that no one can monopolize or control the market. Even the big banks are strong enough to really control of the market for a long period of time, which makes this market a great place for any small investor to make his moves.
TAKE ADVANTAGE OF THE PRICE MOVEMENTS AND LEVERAGE
The currency market is in constant motion and every little change in prices may mean gains and losses of hundreds and even thousands of dollars. We will explain you how this happens:
In general , the eight most traded currencies in the Forex market are:
USD U.S. Dollar
EUR European Euro
GBP British Pound
JPY Japanese Yen
CHF Swiss Franc
CAD Canadian Dollar
AUD Australian Dollar
NZD New Zealand Dollar
Forex trading is always done in pairs since any transaction involves the simultaneous buying of one currency and selling another . Investments revolve around 14 major currency pairs . These pairs are:
EUR / USD EUR / JPY
GBP / USD EUR / GBP
USD / JPY EUR / CHF
USD / CHF GBP / JPY
USD / CAD GBP / CHF
AUD / USD CHF / JPY
NZD / USD EUR / CAD
When buying or selling a currency pair, each pair has its own Bid / Ask price, for example:
EUR / USD: Sell the pair at the price bid of 1.3451 - or- Buy the pair at the Ask price of 1.3453The first currency shown in a pair is known as base currency or home currency. The second currency in a currency pair known as counter or quote currency.
The price indicates how much quote currency is purchased with one unit of base currency. For example : GBP / USD = 1.6295 means that a pound is worth $ 1.6295. To buy a pound , would have to sell $ 1.6295 . If you sell one pound would receive $ 1.6295.
How can I make profit out of this?
The prices of currency pairs are volatile and constantly changing.
One way to profit is by buying a pair and then sell it at a higher price.
The second way is to sell the pair and then buy it at a lower price.
200:1 leverage in the forex market
The online forex market offers leverage of 200 to 1 (and in some cases even more) which far exceeds the typical 2:1 margin offered by brokers and the15:1 futures market. With 200:1 leverage traders deposit a margin of $ 2,000 to move a $ 200,000 position.
Low transaction costs
Operation costs in the currency market are much more efficient than common fees and expenses in purchasing and selling shares on the stock markets.
Profit potential in both rising and falling markets
An investor has a long position in one currency and a short one in the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this case, the investor benefits from a declining market price. The ability to sell currencies without any restriction is another distinct advantage of this market in addition to the stock market or futures market.
Leverage allows you to achieve a large market exposure by advancing only a small amount of the underlying asset. It is for this that magnifies both gains and losses.
THE RISKS OF LEVERAGE
Even if you only forward a relatively small amount when you open your position, your profit or loss is based on the total value of the underlying asset.
Therefore, the amount you win or lose can be significantly higher than the initial deposit.
The extreme level of leverage afforded in forex trading presents relatively low risk per unit due to its relative stability when compared with other markets. A standard unit of measurement known as a pip equals just .0001 USD. Compared with other trading markets, forex traders must trade a much higher volume of units in order to make any considerable profit. For example, many brokers offer 200:1 leverage for investors, meaning that someone bringing $1,000 can control $200,000 while taking responsibility for any losses or gains their investments incur. This intense level of leverage presents equal parts risk and reward.
The required margins and slippage factors may vary according to the regulatory rules in force in the country where the account is open.
LONG AND SHORT POSITIONS
Depending on whether you think the market will go up or go down , you can purchase
('long' position) or sell ('short' position) in foreign exchange markets.
Suppose you believe that the euro will go up in price. In this situation you open a long position in EUR / USD; this means you sell dollars and buy euros.
If you think the Euro will depreciate, you open a short position in EUR / USD. This means you sell euros and buy dollars.
The movement of currencies are measured in terms of pips or points. Usually a point or pip be the fourth decimal. For example EUR / USD, a movement from 1.3443 to 1.3444 is a point or pip.
A forex quote always be accompanied by two prices : a selling price (bid) and purchase price (offer or ask). The difference between the two prices is the spread.
The bid price is the price at which you can sell one unit of the base currency.
The offer price is the price at which you can buy one unit of the base currency.
The difference between the purchase price and the sale is known as spread.
FUNDAMENTAL ANALYSIS VS TECHNICAL ANALYSIS
Fundamental analysts tries to determine the value of financial instruments within a market . The goal is to anticipate the movements based on events and external influences, rather than observing the graphics.
For example, to know the true value of a stock, fundamental analysts take note of the next factors that may affect the price of this. For example, the relationship between the financial statements, revenue forecasts , management, profits and growth. Then, they issue a a final judgment on the active, perhaps compared to similar values in its sector or similar stocks, in relation to which the price right now is overrated or underrated.
Technical analysis gets all the information you need directly from the charts. It doesn’t look at what is happening with the components of a market, but it studies the movement patterns of the market itself. Examinating the figures, technical analysts can see how buyers and sellers behave. Since some graphic figures have been repeatedly over time, it is possible to identify them as they appear. This helps to predict possible future market trends.
SOME OF THE FACTORS AFFECTING FOREX MARKETS ARE:
Interest rates set by central banks that have the most important role of moving paper currency prices. Because currencies are the image of a country 's economy, differences in interest rates affect the relative value of currencies in relation to one another.
An increase in interest rates could encourage operators to invest in that market, creating demand for this currency rise. Investors buy assets denominated in currencies of high interest because they offer a higher performance.
But keep in mind that an increase in interest rates also means that money is more expensive. This makes investment opportunities less favorable if it is necessary to borrow money, and thus, may curb demand for that currency.
A drop in the interest rates may cause investors to have less interest in acquiring assets in this economy, because it reduces the return on investments. This can lead to a weaker demand and make the currency lose its value.
However, a fall in interest rates also makes it cheaper to borrow money, and can make investment opportunities more interesting and increase the demand for that currency.
When Governments anounce economic data, such as GDP (Gross domestic product), unemployment and industrial production data can have a significant effect on the currency markets , because they affect the confidence in the economic stability of the country.
For example, if unemployment in the United States is high, this may reduce confidence in the U.S. dollar, encouraging investors to sell the currency. If investors are more inclined to sell than to buy the currency this lowers the price of the dollar against other currencies.
Another example: if a government of a major economy announces that they will build more factories, than this could revalue the dollar because investors can interpret that U.S. companies are going to receive orders for steel and other construction materials.
Each investor has a personal opinion on which direction the forex market takes, but the market apparently reflects what most participants believed that was going to happen.
When making decesions traders often try not to use market sentiment but more scientific methods such as technical analysis, evaluating and the use of graphic tools that help to predict which direction the market will take on the short and long term.
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Forex and CFDs are leveraged products and carry a high level of risk. You can lose all your deposited capital.