Forex (Foreign Exchange) – market that determines the relative values of different currencies. The price of a currency is actually a reflection of what the market thinks about the current and future condition of a country’s economy compared to other countries.
>> Example – the USD has been strengthening in relation to the british pound in recent months. Strategic and well – informed forex trader would anticipate this trend between the two currency pairs a few months in advance. He would then sell his pounds to purchase dollars while exchange rate still favored the pound. As the value of the dollar increased over time, the number of US dollars he owned would gradually be worth a larger number of pounds. Today, he could then sell his US dollars at their increased value and buy back British pounds for less than their original selling price, making a handsome net profit.CURRENCY PAIR
are divided into majors, crosses and exotics. Major represent developed economies and are highly liquid with low spreads. They are stable and predictable in relation to other asset classes such as small cap equities and stocks. Major include EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD and NZD/USD.
Crosses do not include the US dollar in the currency pair and are ideal for diversification. Crosses include GBP/JPY, EUR/GBP, CAD/JPY, AUD/CAD, EUR/AUD and NZD/JPY. Exotics include a currency from developing country, so they are extremely illiquid with very high spreads. Examples include the Hong Kong dollar (HKD), the Singapore dollar (SGD), the Russian Ruble (RUB), the Indian Rupee (INR) and more. Also, the currencies of the Scandinavian countries are considered exotic, although they represent developed economies.
There are many traders who successfully trade other types of pairs too, but a general rule of thumb for beginners is to start off trading the most currency pairs.
HOW TO READ THE QUOTES?
Currency pair quotes may seem confusing at first, but reading them actually pretty straightforward. In the example above, the EUR/USD quote of 1.1302 shows how much one euro (EUR) is worth 1.1302 US dollars. The base currency is always the first one listed the pairing.
Just like other markets, forex quotes consist of two sides, the bid and the ask:
When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened.
The three exceptions to this rule are major currency pairs that are not based on the US dollar they include; the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR).
For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and buys less of the other currency than before.
In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
PIP
Price Interest Point represents the smallest change in a currency pair. Typically, it is the fourth decimal point , although many brokers quote using the fifth decimal. However, the fifth doesn’t really affect the price as it changes really quickly.
Currency pair that includes the U.S. dollar, a pip is a 1/10,000 of a dollar, whereas when the currency pair includes the yen, a pip is 1/100 of a yen because the yen is closer in a value to 1/100 of other major currencies.
SPREAD
The difference between the sell quote and the buy quote (in pips). The higher the liquidity of a currency, the lower the spread.
WHAT INFLUENCES CURRENCY RATES
CENTRAL BANKS
NATIONAL ECONOMY
POLITICS
In forex, all information is transparent and instantly available, and therefore, trading decisions are based on real facts and not just inside information like in the case of stock market. Also economic factors like the interest rates and inflation are accurately and instantly released by reliable resources like Reuters, Economist, Bloomberg etc. but also from government agencies. Economic data can really cause market fluctuations and forex brokers can take advantage of the situation to realize a profit.
Example how the euro rate dropped
EURUSD
LEVERAGE – THE GOLDEN TOOL
Through the use of leverage, you can invest a small amount of money while trading larger positions through a loan from your broker. when the trade closes, your broker deposits the money into his account. All processes are made automatically through the trading platform. Leverage is presented in the form of a multiplier that shows how much larger the open position is against the margin (the actual investment amount) when it is opened.
The typical options of leverage in forex include 50:1, 100:1, 200:1, 400:1, 500:1 and 1000:1.
I am using 1:1000 and 1:500 with the minimum investment of 100$ in my trading account.
Tips and warnings
