Introduction to Forex

G44FX
/ December 27th, 2018
Introduction to Forex

WHAT IS FOREX:

The term “FOREX” is used for Foreign Exchange (also known as FX) which is an online global network used to buy and sell currencies with the daily turnover of $5.1 trillion. It provides facility to trade 24 hours a day and 5 days a week where banks, individual traders, financial institutions and companies can participate.

There are two major tiers in the forex market, the first one is an interbank market where currencies of different countries are exchanged by the biggest banks. The other one is the over-the-counter (OTC) market where companies and individuals can trade.

With the irregularity within the performance in other markets, the boom of foreign exchange buying and selling, making an investment and control is in an upward direction.

LEVERAGE IN FOREX:

The potential to hold a large quantity of amount as your capital with little cash of your own account is called leverage. It can also denote the sum of debt an employer uses to finance assets. When one refers to a corporation, assets or investment as “incredibly leveraged,” it processes that item has more debt than equity. As an example, if a forex broker gives you the leverage ratio 100:1 then it means you could trade $200,000 with $2,000.

If you open a trade entirely with your capital of $200,000 using 1:1 leverage ratio, your gain amount will be $2,000 using a 1% return. If you end up with the loss, you will lose your 1% of capital.

Now you have leveraged by 100:1 ratio. Your broker will use $2,000 amount of your capital for the same trade of $200,000 with the same profit ratio. If you end up with the loss, you will lose all of your invested capital in this trade.  

How to calculate leverage and margin percentage:

The leverage ratio is 100:1

Margin=1/Leverage=1/100=0.01

Margin percentage of 1/100=0.01=1%

Leverage=1/margin =100/margin percentage

Leverage =1/0.01=100/1=100

THE MARGIN IN FOREX:

For your better understanding remember the previous example that a trader can make a trade of $200,000 with just $2,000 using the leverage of 100:1. So, if the trader wants to do this trade then he will first deposit the “margin” of $2,000 in his account if the account has no amount before the trade.

In other words, the amount required as a good faith deposit to hold opened position is called margin. It is expressed in the percentage. For example, if the broker provides a 1.00% margin (which is equal to 100:1 leverage) then you can trade $200,000 with $2,000.

Few terms used in the margin are given below:

Margin Requirement:

We have discussed in the above section, the amount of money required to hold a trade position.  

Account Balance:

The total amount of money in your trading account is your account balance.

Margin Call:

You get this when the amount of money on your account cannot cover your possible loss. It happens when your fairness falls below your used margin. In case of a margin call, all opened positions will be closed at the current market value by your broker.

Usable Margin:

The quantity of your account balance which is available for open new trading positions.

Used Margin:

The locked amount of money used to hold your current trading position. You cannot use your money until you close the current trading position either you receive a margin call or when your broker gives it back.

DEFINE THE LOT WITH LOT SIZES:

The lot is a standard used to specify your trade size or volume in the forex market.
The standard size of lot size is 100,000 units of your base currency. There are also mini, micro and nano lot size available in the market. Mini, micro and nano lot sizes contain 10,000, 1,000, and 100 units.

ADVANTAGES OF FOREX TRADING:

  1.    Very high liquidity

Forex is at the highest level in the market, because of the highest number of participants all over the world. So, it has high liquidity that’s why large orders are easily full filled in an efficient manner.

  1.    Trade without central exchange

This market is an over-the-counter market and there is no presence of central exchange. Only in some rare cases, central banks interfere, as on some extreme conditions.

  1.    Highly volatile

If the trader finds another profitable currency then he can switch to that currency and invest in the same currency.

  1.    Low capital required

Unlike other markets, a person can easily start trade in forex using a small amount of capital

because of the presence of margin trading and a high leverage factor.

  1.    Training and real-time practice

If a person has no experience of forex market then he can boost up his skills with a lot of available training material and practice real-time trades using demo account provided by brokers.

  1.    A range of pairs available for trade

In forex, there is a range of currency pairs available by the brokers. Many of the brokers offer to trade between 40-70 currency pairs. If you have not much experience in the forex market then trade only in major currency pairs.

  1.    Trade 24 hours

In forex traders can trade 24 hours a day and five days a week. So, you have the facility to work in a comfortable time zone.

  1.    Maximum leverage

Leverage is described in ratios, for example, if the broker provides you 50:1 ratio that means for every dollar you can trade $50.

 

DISADVANTAGES OF FOREX:

  1.       Price determination is difficult:

The price determination process is very difficult because of the fluctuations in the rates. Rates are influenced by multiple factors. Main factors are politics or economics that can be difficult and complex to analyze and understand.

  1.       24/5 market:

The forex market is open 24 hours a day and investors need to be updated every minute about the market trends. Investors can’t sleep because they are attentive about the fluctuations in the forex market.

  1.       Social Trading:

Maybe the Information which is available on the internet is provided by an inexperienced trader and if an individual trader follows those predictions then he might be experienced with failure.

  1.       High Volatility:

The economy and global policies can change the complete scenario of the market because of its high volatility. Unfortunately, if the market goes down then definitely investors lose their money.   

  1.       Fear factor:

The high-risk factor is involved in the forex market that’s why traders feel fear. The presence of uncertain situations it is difficult to trade, if you are mentally strong then you can reduce the fear and trade efficiently.

  1.       Self- Directed Learning:

In the stock market, traders can be facilitated by the good services of professionals. In forex, all burden is on the shoulders of the trader.  

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