What is Forex?
Forex? How does it work and how to startIf you’re here, it’s why you tried to find an explanation on forex, in simple words, TRUE?
You don’t know how much I also had to suffer to get a clear and complete explanation!
You know, it’s not easy to find an unbiased explanation… around the Web and on forex broker sites you always read the same things, so much so that it looks like all a copy/paste.
I started with online forex a few years ago, when forex trading was much more complicated than today.
Now all it takes is just 200 euros to start forexing, incredible!
Call for tenders:
I want to make things clear, explaining what Forex is NOT.
It’s NOT a way to invest your savings. If you have the spirit of a chest of drawers, that is of that typical Italian that invests in BOTs and then waits for the fruits at the end of the year, then forex is not for you.
You need to be active on the market, you need to operate in real time.
This doesn’t mean that you’ll have to stay all day in front of your pc to do forex. You can dedicate as much time as you like (4 hours a day, 1 hour a day, 1 hour a week for example). There are no precise rules. The important thing is to find the strategy that best fits your intentions and possibilities in terms of time and budget.
How much can you earn with forex, is it a safe investment?
With forex you do not invest, but you speculate. That said, there are 3 factors that determine the type of gain you can make with forex:
Ability (you can acquire these by informing and studying, or you can use an interesting shortcut called Etoro copytrader.
What does Forex mean?
Forex is the fusion of 2 words:
Foreign + Exchange (Market)
This is therefore the market on which foreign currencies are traded.
How does forex work?
What I propose below is an explanation I gave to a friend of mine. It worked with him, I hope it works with you :
<< Imagine you are in a currency exchange office abroad, travelling to the United States: You have a 100 euro banknote in your hand, and you want to exchange it in dollars.>>
<< Let’s assume that the official euro/dollar exchange rate is 1.30 a.m. at that moment. The calculation would seem easy: you should receive $130. The calculation I made is 100 * 1.30 = 130 dollars. But forget to consider the commissions that the exchange office asks for its service. >>
My friend makes me:
<< looks that wrong, often offer changes without commissions! >>
That is not correct.
<< The commissions there are,:the mediator, this case the exchange office, will change your euro to 1.29 or less. It is therefore an ‘implicit’ commission cost. The same thing happens in the online forex marketplace. Here too there are brokers, the so-called “forex brokers”. Each forex broker is a broker, based on a platform that allows you to enter the dorex market and trade. They also use this “implicit commission” system, called spread. >>
Commissions and spreads, how they work
The broker, when opening a forex trade, will charge you a slightly higher price (if you buy) or lower price (if you sell). This is the spread the broker earns by allowing you to trade.
Usually the spread amounts to a few pips (term that indicates the smallest price movement). Example with numbers so I can explain better.
We want to trade on the Eur/Usd exchange rate (Euro Dollar) and the exchange rate is at the price of 1,1000 (the price is expressed to the fourth decimal that represents the pip or tick). If the price moves from 1,1000 to 1,1001 it will mean that it has risen by a tick or pip.
We want to open a buy or long trade with our broker who applies a 1 pip spread.
If we buy at 1,1000, our broker will practically bring us into the market at a price of 1,1001. If we buy the price must rise to earn, if it falls we will piss. Conversely, if you sell.
At this point we find ourselves in loss of 1 pip because we entered 1,1001 while the real price is 1,1000. How much are we losing? 1 euro for each lot of 10,000 euros/usd. You will understand these numbers better when we talk about lots and sizes of positions in the forex.
This example was to make you understand that the spread in practice does not affect trading performance because it represents a very small part of the trade.
Clarified the basic functioning, we deepen the technical part. You will surely have read on Wikipedia, that forex is the “largest financial market in the world”. We’ll fill in the details about the figures and history of forex.
What you should be interested in is that thanks to the Internet is a market accessible to everyone, and since there is a large number of trades, the forex is very liquid: they turn a lot of money.
And where a lot of money goes, trade and business are facilitated and very frequent.
This allows you to trade forex and buy and re-sell after a few minutes. Many trades mean volatility, i.e. frequent fluctuations in the price of one currency compared to another.
Yes, because each price is nothing but the ratio between one currency and another.
The value (price) of one currency against another is called the exchange rate.
The forex market does not have a physical location like the Stock Exchange (London, new york…). It is therefore said that forex is an OTC (Over The Counter) market. This is why trading is only done electronically (definition of online forex trading).
What allows you to trade forex is an intermediary, the forex broker.
What are currency pairs?
As we have seen above, in forex the protagonists of the exchanges are the currencies (US dollar USD, Japanese yen JPY, euro EUR etc…).
You trade on a currency pair (cross). For example, EUR/USD is a currency pair available on the forex market. You can choose whether to buy or sell. In forex, as in other markets, you can earn even when the price falls.
If you buy (in jargon go long) for example EUR/USD for the price of 1.4020 you have to hope that this value increases to be able to resell it at a higher price and earn. It will be necessary for the euro to increase its strength against the dollar.
Conversely, if you sell (go short) EUR/USD at the price of 1.4020 you will need the value of this cross to go down to resell at a lower price and earn money. The euro must lose value against the dollar.