Understanding forex – foreign exchange explained simply
Forex trading or foreign exchange trading is a business based on speculating on the fluctuating values of currencies between the two countries. The trading goal is to make a profit by converting one country’s currency into the currency of another country. Forex trading includes all aspects of buying, selling and exchanging currencies at current or determined prices.
Understanding forex trading
Each country has its own currency and when the currency of a country is traded or exchanged with the currency of a foreign country, this is called foreign exchange (forex trading). Investors and traders who are interested in Understanding forex should be aware that the currency pairs are decided by the forex brokers. These brokers may not be able to offer a match for the currency pair a trader is interested in.
Forex explained in simple terms and example: Forex is trading of currency pairs. One of the most popular currency pairs is the EUR/USD where EUR or EURO is the European currency, and USD is the united states dollar. The value of the forex pair will increase when the Euro value increases compared to the dollar and vice versa. When the trader buys EURUSD he believes that EUR will rise against the USA dollar.
If a trader speculates that the USD value will decrease in comparison with the Euro, they will invest in the EUR/USD and wait. This kind of trading is called going long. If the dollar value is likely to increase, the trader will go short on the same pair. All trading is routed through forex brokers, who are intermediaries, executing the trade in the open market. Since there is no centralized market for forex trading, the rates offered by the different forex brokers may be different at any time. The forex brokers place their orders using the networks of the major banks. The orders are executed electronically within a fraction of seconds after they are placed.
Forex how it works
Forex trading is all about buying and selling currency pairs.Forex market is network of buyers and sellers and they transfer currency between each other at an agreed price. For forex trading, each trader need to have a forex account and basic knowledge about technical and fundamental analysis. The basic advantages of foreign exchange are high liquidity, 24 hours market, small transaction costs.Forex is legit business where more than 5 trillion dollars each days fluctuate in forex market.Forex trading is not scam – it is as same as trading stocks or any other asset.
Leverage in forex trading
For most people, the main purpose of trading forex online is making money. Large companies may trade in forex for a purchased planned in the future, or for offsetting a contract which they bagged. Retail traders hope to make money from forex trading due to the changes in the values of the currencies they are dealing with. Forex brokers are usually offering the traders leverage while trading. Leverage allows the trader to trade for amounts that are larger than the balance in his account. The forex broker benefits from leverage since the fees will be directly proportional to the amount being traded. The forex broker collects an amount which is called the spread for each trade.
However, there are some disadvantages of using leverage. Many inexperienced traders, use the maximum leverage available., They often make losses, and use up all the money in their account. Hence it is advisable for new traders, to spend some time, learning forex trading, and using the least amount of leverage while trading initially to reduce their losses.
The most important thing is risk in forex trading. Forex offers high leverage. where traders are able to engage in the conducting of trades in the market by using larger sums of money than what their accounts actually possess.
Risk in forex trading need to be small and managing risk is really one of the most important jobs for each trader.
But the person would yet hold the power to engage in the controlling and trading on the market with a currency in the amount of two thousand dollars. This can be somewhat dangerous due to the fact that new traders may be eager to commence trading with leverage set at 50.1 instantly. But they may not give any preparation concerning the consequences that may ensue.
It sounds like a fun experience to be able to trade with access to leverage. This can increase the chances for one to make good money. However, there is not much talk about the fact that this can also present a higher risk of devastating losses as well.
When someone trades at a rate of 50:1 with the sum of one thousand dollars in their account, this indicates that the person would be conducting trading in the amount of fifty thousand dollars on the market. Each pip is therefore worth about five dollars. When the move for the daily average pertaining to the price of a currency pair is set at 70 to 100 pips, this would mean that the average loss could equate to three hundred and fifty dollars. If one engaged in the conducting of a fairly poor trade, this could result in the loss of a whole account in three days if there are normal conditions in place.
So when we talk about profit, 95% of traders lose their money because of high-risk trading, overtrading, lack of risk management plan.
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Many new traders hold a lot of optimism with the belief that they could potentially see the doubling of their account in only a few days. Yet, seeing your account undergo many serious fluctuations can indicate that it will be difficult for your account to double in a short time. Many people commence with the assumption that they are able to endure this scenario. Yet, they are not really often able to handle the scenario, they make grave mistakes in their forex trading efforts and no money remains in their accounts.
Though one may truly not fall prey to the trap of the leverage, the big difficulty is to be able to control one’s emotions. One must be able to be in control of his or her emotions when conducting trades on the forex market due to the fact that this market can be wild as a roller coaster and it takes a strong drive to be able to accept the losses at the proper time and not to make the blunder of grasping onto trades for too long a period of time.
How the forex market really works
The forex market works like one big money exchange office. In every second some buyer buys the currency and some other sellers sell the same currency. Because there are millions of algorithms, millions of traders, billions of positions around the globe forex markets do not allow that some strategy becomes forever profitable.
When you lose money in forex where does it go?
This is the most common beginner question. Value is determined by what people are willing to pay. Forex is a zero-sum game and when you place your order and lose money your investment creates price value. When you buy an asset, on the other side someone sells an asset. Buyers and sellers create price value.
Forex traders will first identify currencies whose value is likely to increase in the future. They will then purchase these currencies at the right time and wait till its value increases to make a profit. Though forex trading appears simple, in reality, it is far more difficult to make a profit. Many new forex traders think it is very easy, so they do not do the research required. They then make mistakes and criticize or blame the market for their losses. The reality is that the forex market trading is very similar to the stock market trading, and others, only forex traders are allowed more leverage for their account. Forex trading is like other investment option, it requires some patience and knowledge to make a profit.