What is forex trading?

We analyze in detail what Forex is, how it works and how it works.


Today we will analyze what Forex is and how it works.

Each article about “Forex” is written according to one scheme: first, a novice trader is introduced to the translation of the word “Forex” (“currency exchange” from English, abbreviated from “FOReign EXchange”). Then, they certainly mention about 5 trillion daily turnovers. Each author, probably, considers this data for 2016, it seems, the year is really shock content. Further, there will be a comparison with the stock exchanges: “Ah-oh, Forex is the largest market in the world, and all other markets envy him.” The only question is:

What is the use of this knowledge?

We will not do like everyone else, but we will discuss only the users that we can get from Forex and the basic rules for its use.

How does this mysterious Forex work?

Okay, let’s put it thesis, about the most important, namely – HOW this Forex market is organized.

Everything is quite simple: as in ANY market, there are “big guys” (central banks of countries, commercial banks), there is a “smaller fish” (pension, investment, and other funds) and there are those who can be called “retail” (various exporting / organizations importing goods, private investors and even you and me, just buying and selling currency).

There is also an opinion that large players “supposedly“ drive everything ”, who supposedly“ move the price ”against small ones.

But with a detailed study, it becomes obvious that the situation is approximate as follows:

Starting a trade, one should not be afraid of the excessive influence of “large players” on the price. They adapt to market conditions in the same way when faced with superior strength. This force can calmly be a crowd of small participants, at the same time standing against a major player.

What am I talking about? Oh yes. Do we really influence you too? Yes, of course. However, not directly, but through intermediaries:

  • if we “buy” / sell currency “at a time” when we want to go to another country, commercial banks help us.
  • if we plan to make money on the difference between the current exchange rate and the future, you need to go to a Forex broker. Through, which, incidentally, cannot be purchased for personal use (as in a bank). This is not a currency exchange, but currency trading.

So it turns out that with our deals through the “big guys”, each of us has a small effect on global currency turnover. Cool? “Cool, now tell me how to make money here.” ☺

How does forex trading work?

You would know how I dislike writing about it. I am making a direct effort on myself, knowing that this topic has already been beaten and hackneyed so much. Alas, for profitable trading, a trader must have a basic understanding of these things. I am glad that this little understanding is, in general, enough. I very much hope that I will succeed even a little less gloomily and more “in essence” than in other articles.

Well, let’s go on frequently asked questions so that you have an idea about the Forex market.

It started: how can I start earning here? I want to buy a currency because tomorrow / in a week / in a month it “should” grow. How can I do it?

The first thing that will cool your fervor is the threshold for entering the exchange. It is about 100 thousand dollars. Analogy: Imagine a store where the cheapest product costs $ 100,000. How to buy something in it if you do not have such an amount? Elementary. We need to “chip in” with someone else. ”

If you have $ 1000, someone has $ 10,000, someone has $ 5,000, and you like them, for example, 50 people – you take off and buy.

The Forex broker LiteForex in this analogy is the one who “buys at all”. For example, someone wants to buy euros for dollars. Forex broker, taking into account the wishes, make “large purchases” at all. This allows “retail participants” to buy/sell Forex currency without even having $ 100,000

The second nice bonus on the part of the Forex broker is leverage. You need to understand that leverage is a tool. Like a hammer or drill. And just like with any tool, the effectiveness of its use depends on the competence of the user.

The essence of leverage is that having $ 1, you can buy currencies as if you had $ 100, setting the leverage to 1 to 100.

Let’s figure out how this is possible. Let’s say the euro-dollar rate is 1.10250

Suppose I have a start-up capital and I bought 1000 euros. I spent 1.10250 * 1000 = $ 1102.5

Then rrrrr times! And the rate fell to 1.10000. I, upset, sell my 1,000 euros. I get for this 1.10000 * 1000 = $ 1100

If the rate rose, for example, to 1.10450, then when closing a deal at this level, my result would be like this. 1.10450 * 1000 = $ 1104.5

In the example, if the rate would fall after opening a purchase transaction, then my losses amounted to 1102.5-1100 = $ 2.5.

In the growth example, I would make $ 4.5 profit. Just a thing.

And here the leverage comes to the aid of the trader, with the help of which it is possible to proportionally increase the volume of the transaction, and therefore the profit on it. And having set the leverage 1 to 100, my result in case of success would be 100 times more, and this is already $ 450. Not bad, agree?

Therefore, using leverage, having $ 250, I can buy $ 100,000 euros, having $ 2,500 – $ 1,000,000. As a result, I can multiply the financial result of my transactions by a size proportional to the leverage. Another question – is it worth betting everything?

Forex – making a profit regardless of the market trend

Take a pair of EUR /USD. What does its exchange rate mean? For example, let it be 1.1000.

This means that 1 euro can be bought for 1.1000 dollars.

For example, imagine that we are a medieval merchant who is an expert in barter relations. We have some millet and some apples with us.

Suppose you can buy 1 bag of millet in the market for 2 bags of apples. Let this pair be called PSH / YABL. Her course in our case will be 2/1, i.e. 2.0000

Further. If it is expected that millet will become more and more valuable, it makes sense to BUY MILLET for apples. Those. we will BUY a couple of PSH / YABL: bought millet for 2 bags of apples, sold it for 3 bags – earned 1 bag of apples.

If we expect millet to become less valuable and apples to become more valuable, then it makes sense to ACQUIRE APPLES for millet. In other words, we WILL SALE PSH / YABL pairs: they sold millet for 2 bags of apples, waited, and then bought millet for 1 bag of apples. Earned the same 1 bag of apples.

Same thing with currency pairs: Suppose we expect a rise in the value of the euro and a drop in the value of the US dollar in the Forex market. Then we will BUY EURO for dollars. In other words, make a purchase of a pair of EUR / USD.

If we expect an increase in the value of the dollar and a drop in the value of the euro, we will BUY DOLLARS for the euro. In other words, to sell the pair EUR / USD.

Thus, the appreciation of the EUR / USD pair means an increase in the value of the euro against the dollar. A depreciation of the EUR / USD pair means an increase in the value of the dollar against the euro. Clear? Let’s try it.

The conclusion is that when buying a currency pair, and when selling a currency pair, a trader buys one currency and sells another. Thus, he can earn both on the growth of the currency pair and on its fall. The result will depend on how skillfully he does it.

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