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This is a series of articles about The Foreign Exchange Marketplace. You may learn here what Forex is , how it works and how profitable it could be. The whole series contain  the following articles  

1.What is Forex

2.Technical evaluation

3.Fundamental evaluation

4.Money management

5.Compound interest

What exactly is Forex?

The word Forex is an acronym for The Forex Exchange Marketplace. This is the most liquid industry on the globe where you can trade or exchange one currency for another. For example, should you think that the Euro will appreciate in value and you have US dollars, you can buy and sell the dollars for the Euros. If you’re correct and also the Euro appreciates in value in relationship with the dollars, then you can close the position realizing a profit.

That’s the basic idea behind the Spot Forex Market. This really is an interbank system which means that it is not centralized. There is certainly no central exchange where currencies are traded. It can be a global market. You can buy and sell Forex online 24 hours per day, 6 days per week. 

This industry emerged at the beginning of the 70′s decade. The reason was that currencies where not backed up by gold anymore. They began floating freely. Their value depended on forces of supply and demand due to economic elements, speculation, etc. This originated the Forex Market.

You can trade Forex on the Internet as I mentioned above. There are many brokers like www.oanda.com that allow you to open an account with just $300 to $500 and begin dealing online. You can also get a demo account very first and trade with play funds just to “test the waters” and see in case you like this industry or not.

Demo accounts are free with most brokers.  Some brokers offer demo accounts which expire within 30 days whilst others never expire. It’s important to trade on paper, due to the fact you can test your strategies and see if they work or not.

Trading Forex is risky, but it could be very profitable too. You can trade at anywhere from 20: 1 to 400: 1 leverage. This means that the broker will lend you more funds than you have on the account to trade.

For example, let’s say that a broker allows you to trade at 100: 1 leverage. Should you use all the leverage, for each dollar that you have on the account you can buy and sell 100. Let’s say that you have $1,000. With $1,000 at 100: 1 you can buy and sell $100,000 worth of dollars in exchange for other currencies. You multiply your buying and selling potential a lot. This allows you to realize bigger profits, but you also incur in bigger risks.

Let me show you an example. Let’s say that you have 100: 1 leverage on the account and you trade at full leverage with $1,000. The EUR/USD pair (Euro/US Dollar) is buying and selling at 1.2500. So, you enter a position on this pair.

Let’s say that you are long. If the market moves in your favor by just one cent (1.2600), you will double your funds and end up with $2,000 on the account. If the industry moves against you by just one cent (1.2400), you’ll lose all the funds that you simply have on the account or most of it depending on the broker you might be dealing with.

This can happens truly quick. The industry can move this a lot in a matter of minutes or hours. This is what makes Forex really profitable, but also really volatile. I don’t know if novice dealers can understand the magnitude of what I am saying here. Numerous people get into Forex trading only seeing half of the truth. They get pulled into this market by all the hype flying around it.

I do think that no other market inside the globe offer the opportunity to make funds like this market does. On the other hand, you will find some risks involved. It is important for new traders to trade on paper first before compromising real capital. We learn accomplishing. I didn’t learn numerous basic concepts about this market until I started buying and selling having a demo account.

Now, let me explain other important facts. The Spot Forex Market is traded in currency pairs. Whenever you enter a position you trade one currency for another. For example should you buy EUR/USD you are buying Euros and selling US Dollars. If you sell EUR/USD you are selling Euros and buying US Dollars.

When you enter a position, you can not trade other currency pairs unless you have additional funds on your account, but you can trade several currency pairs at the same time as long as you have enough margin/funds to trade. Should you have by no means traded Forex before, you can see how all this works when you practice having a demo account.

Another factor which you would like to understand is the fact that Forex is traded in pips. Your profit on each and every trade depends on numerous aspects. One of those aspects are pips. Another one is how a lot leverage you are using per buy and sell. A pip may be the minimum unit that the price of a currency pair can move.

For example, within the case with the EUR/USD a pip is equal to 0.0001. If the price is at 1.2500 and it moves to 1.2501, it moved one pip. If it moves from 1.2500 to 1.2600 it moves 100 pips, like within the example above.

Now, how much you make on each and every trade depends on how numerous pips you make and how much funds you invested on that trade. Also, what exactly is the leverage for that account. If you buy and sell at full leverage with a 100: 1 leverage account and you trade $1,000, if the market moves 50 pips in your favor, then you will make $500. This can happen within just a few minutes after you enter your order.

Most experienced dealers wouldn’t recommend you to buy and sell this way though. The reason is the fact that if the marketplace moves against you, then you could lose everything within minutes. It’s better to have lower profit objectives for each and every single trade and compound your profits over time.

Cash management principles stay that it is better to by no means risk more than 1% – 3% of your capital, specially if you’re an inexperienced trader. This really is something that I will explain more under other article of this series.

Well, I hope this information have been helpful to you. This was an introduction to the Forex Marketplace. You can read more about Forex on my other articles.

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