If you have already started in the financial markets, surely you have heard this famous word somewhere. But what exactly is Forex? With this name is known the global market of buying and selling currencies.
The Forex market is a global market that moves more than a trillion dollars daily. It is an unregulated market that, for many investors, offers great possibilities of obtaining liquidity. It also entails significant risks that need to be known before entering it.
The Forex schedule can be considered the most flexible in the world: it is open 24 hours a day to investors, although activity levels vary during the day. Today we explain what the Forex is, how it works and what strategy you should follow if you want to launch into this market.
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Forex Trading Basics
The difference of the Forex with a stock market, in which an investor buys and sells shares of a company, is that in the Forex market the trader buys and sells currency. In Forex, all currencies are bought and sold simultaneously by currency pairs.
The currencies are codified by 3 letters. Some of the best known are:
USD: US dollar
JPY: Japanese yen
GBP: pound sterling
CHF: Swiss Franc
AUD: Australian dollar
CAD: Canadian dollar
When investing in Forex you buy and sell lots of currencies, which is how you call the unit with which you are trading in this market. A lot is the minimum amount of currency with which a Forex transaction is performed.
A standard lot is 100,000 units of base currency in any pair.
A mini lot consists of 10,000 units of the base currency.
A microlote represents 0.01 of a lot, ie 1,000 units of base currency.
The “pip” to calculate in Forex
Another exclusive concept of the Forex market that you should know before you get into it is the pip. It refers to the difference points between the entry and exit price in a Forex investment. It is, in short, the way to calculate the gains or losses in a certain investment in Forex. We can see it better with an example:
If we buy a currency at 1.6225 and then sell at 1.6250, there has been an increase of 25 pips. Since each currency has its value and, in addition, there are currencies that offer two decimals and others can reach up to five, a pip must be calculated for each particular currency.
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Top Forex Pairs
In Forex, when an investor performs a currency transaction he is buying or selling the so-called base currency. If the currency pair is, for example, USD / EUR, or what is the same, dollar / euro, means that the US dollar equals so many euros and, in this case, the US dollar is the base currency.
The dollar / euro on Forex, or USD / EUR if we use the correct terminology, is one of the most traded and highest trading currency pairs, although there are two other major pairs:
USD / JPY
GBP / USD pair
So that you understand the logic of operation of the pairs, let’s take the euro / dollar pair as an example. In this case, the investor will be buying euros and selling US dollars simultaneously. When you decide to do the opposite – sell – you will be selling euros, putting you short euros and long in US dollars.
Forex: How to buy and sell in this market?
More than 4,500 institutions are actively involved in the foreign exchange market. An investor, therefore, must find an intermediary, one of these institutions, to buy or sell the amount of foreign currency he decides.
The investor is bullish in one and bearish in another, depending on the expectation of evolution that one currency will have with respect to the other. The basic premise is to buy a currency at a lower price than it will be sold.
Investing in Forex: How do you get profits?
In this market, the investor obtains profits by exchanging one currency for another with the future expectation that the price of the same will change in his favor. That is, it is expected that the price of the currency that the operator buys is appreciated with respect to the one that sells or, what is the same, that the one that sells is depreciated with respect to the one that acquires.
In this exchange comes into play the exchange rate, which is the difference in value between the two currencies. The dollar / euro exchange rate on Forex indicates how many euros you need to buy a dollar or how many dollars you can buy one euro.
From this information, we can see how profits are obtained when investing in Forex through an example.
What does the investor do?
Buy 10,000 € at a rate of EUR / USD of 1,300 + 10,000 10,000 x 1,3 – 13,000
Two weeks later, the EUR / USD rate is at 1, 350
10,000 x 1,35 + 13,500
The gain is 0 13,500 – 13,000 500