What is the Forex?

forex

The forex market is the market of the currencies, where are exchanged, bought and sold currencies like EUR USD GBP JPY etc…

We (the traders) can get profit taking advantage from this price changes and wavering. The beautiful thing of this market is that we can use the leverage, we put a small amount of money and trade with very much more (hundreds of times), the intermediary (the broker) give us the difference. For example with a leverage of 1:100, with 100 dollars we can trade 100.000 dollars. This is a multiplier factor, if you are able to get advantage of it you can have big big profits and small risk. non-directional traders trade in this way, using the leverage to obtain an advantage.

 

forex

Do forex means negotiate a currency exchange for another. When we travel abroad and we are forced to change our money with those of the country where we’re going, we make forex operation. As surely you know exchange rates between currencies are not fixed, but continually fluctuate, so you can earn from forex taking advantage of these swings, buying a currency when the price is lower and thus more favorable to change us and reselling when the price is higher.

Let’s take a practical example: Marco goes in the United States and changes in euro 1000 dollars. At that time the change is 1.35, meaning a euro is worth $ 1.35, Exchange Office, therefore, against EUR 1000 are awarded $ 1350.

What happens is that Marco has an unexpected and can no longer go and enjoy your well deserved holiday. Taken from his daily chores, these dollars that had changed remain parked in a drawer at home for about 4 months. After 4 months remembers this money and goes to the Bank for rewarding them for euro again.

The euro was quoted at that time 1.20, so in the face of his $ 1350, the Bank gives 1125 euro to Mark.

Marco has earned 125 euros without doing anything, simply forgetting of the dollars in a drawer, not bad huh?

Obviously to work systematically in the forex market, traders like we do, there goes to the Bank to change money, but you use the broker. A broker is a kind of Bank, which stands between us and the electronic currency market, where we can open an account specially designed to operate in the foreign exchange market. The broker then provides us with a platform, a software to install on your computer and even mobile phone to log on and perform in our operations of buying and selling coins.

The advantages of using a broker rather than go ni Bank are at least two.

1-tax, spread or commissions that are paid for the service that is offered through a broker are smaller then a bank or currency exchange office.

2-the broker allows us to operate the leverage

Let’s explain the concept of leverage.

Leverage is a mechanism that we can open to a certain amount of money, putting a guarantee only a small part of it, the difference is paid by the broker, temporarily until the closure of the operation.

Let’s take an example.

With a leverage of 1 to 100, we can enter the market with 100 times our capital.

So if we open an account with a broker, and settle 1000 dollars, we can enter the market with 100,000 dollars, obtaining an important benefit, because obviously with this capital increase, the smallest price fluctuations there will bring a big gain.

With a leverage 1 to 200, with 1000 dollara we can trade from 200 thousand dollars

With a leverage 1 to 50, with 1000 dollars we operate with 50 thousand dollars.

It’s important not to overdo it with the leverage, because how can I get big bucks from small fluctuations in exchange rates, the same logic we will have big losses in case we do not operate properly.

To operate in forex market is not going to do be that simple , you must use a trading method or strategy.

The foreign exchange market, not always moves at random and entropic manner, but in many cases it follows certain directions according to particular factors, thus observing the market and working with smarts, you can anticipate its direction, for example, the easiest way is to identify trends and follow them. A trend has a consolidated leadership, when there is a price trend follows a direction, downward or upward, for a long time and it is unlikely that this trend will reverse, so entering in that direction will certainly gains.

In general a trading strategy is a set of rules that allows us to operate in the market being able to predict the movements and gaining.

There are many of these strategies, some more, some less reliable, some more complicated than others.

Name a few:

  • Trend following

  • Breakout
  • Use of cycles

  • Swing trading
  • Martingale