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New to Forex Guide



 
 
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Old November 25th 09, 03:19 PM posted to misc.invest.mutual-funds
Gregory Wright
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Default New to Forex Guide

Forex is an abbreviation of Foreign Exchange. Like it pronounces Forex
is the simultaneous buying and selling of a currency pair. Many
currency pairs are available for trading (practically all) but traders
rely most on some pairs which are called majors. These currencies are
called majors because liquidity is major for these pairs and this
means that you can sell or buy any of these pairs whenever you like
because a lot of these money are in circulation worldwide.
Forex is a physical occurrence in the global economic system. A
tourist traveling from Europe to USA exchanges euros to dollars and
becomes a potential trader of Forex. Usa companies need to exchange US
dollars before exporting to Europe or Japan. Every currency pair has a
price which is determined by the law of demand and supply globally. If
the demand for a currency is high then it gains in value. If the
supply for a currency is high then it loses in value. Today, Forex
liquidity is more than 3 trillion dollars daily.
The most important for a trader is the meaning of the value of a
currency pair. For example EUR/USD 1.2640 means that you can buy
1.2640 USD with 1 EUR. Remember: An easy rule to remember what this
price means is to translate the numerator (EUR) in 1 and take the
currency value to be the denominator. Some currencies have special
names like Kiwi for New Zealand Dollar, Cable for Great Britain Pound
and Aussie for Australian Dollar. If you become an active Forex trader
you will listen these names often.
How can a trader make a profit from Foreign Exchange?
This is the most important part to understand, so take great care to
understand it thoroughly before reading more. The value of a currency
pair is not the same during the day but changes second by second all
the week besides Saturday and Sunday when the banks are closed. You
can buy or sell a currency pair. This means that you can buy or sell
the first part of the pair and sell or buy the other simultaneously.
For example let's say that the price for EUR/USD is 1.2640. You can
give a buy order for 100 Euros in EUR/USD currency pair. This means
that you can buy 100 Euros and sell 126.40 US dollars. After some time
the currency pair value is 1.2700. Then you can give a sell order. You
sell the 100 euros that you have bought previously and now you can buy
127 dollars. This means that you earned 0.6 US dollars. Let's say that
after some time the pair value is 1.2600. What happens now? You can
give a sell order for 100 euros but now you can buy 126 dollars. You
lost 0.4 dollars when the deal was closed. A deal in Forex is
comprised by a full buy and sell or sell and buy cycle in a currency
pair.
Let's play mo Say the price for EUR/USD is now 1.2650. Sell 10,000
Euros. Buy them back when the price of the currency pair is 1.27 or
1.26.
Have you found the answer? You sold 10,000 euros and bought 12,650
dollars. You bought 10,000 euros back when the price was 1.27 so you
sold 12,700 dollars. That's how you lost 50 dollars. On the other hand
if you have bought 10,000 euros back with 12,600 dollars you would
earn 50 dollars. Notice that the more money you trade the more profit
or loss you realize. Make some examples of your own. Be sure to
understand these transactions well before reading more.
ALWAYS REMEMBER
When you buy you are "long" in Forex language. When you are long you
want the currency pair to appreciate in order to make profit. When you
sell you are "short". When you are short you want the currency pair to
depreciate in order to make profit.
The last digit of the price in a currency pair is called pip. In EUR/
USD 1.2640 the 0 digit is called pip. More specifically the change of
the last digit in one unit is called one pip change. The pip numbers
in forex is the indicator of your profit or loss. In Forex you trade
the last decimal change in the price of currency pair so it is
important to trade big amount of money to realize a nice profit.
If you have tried to understand Forex you should have heard the word
"margin". What is meant by margin? An official definition is:
"The amount of money of collateral deposited by a customer with a
broker, by a broker with a clearing member, or by a clearing member
with clearinghouse in order to insure the broker or clearinghouse
against loss on outstanding futures positions".
Sounds like Greek? Well, margin is the amount you deposit for trading.
The trading company uses this amount as insurance while you trade.
Remember the examples of the currency pairs we used before. In order
to make a sufficient profit per pip you have to trade at least 10,000
United State Dollars. With margin you only have to trade 100 USD. The
remaining 9,900 are forex brokers' money. When you realize loss while
you are trading you lose only from your 100 USD trading money and
forex broker does not lose anything of its 9,900 USD. By the use of
margin accounts Forex trader can experience great profits will small
amounts of money. Bewa Forex trader can also experience great loss
with margin accounts.
Let's look an example of the margin account:
A forex trader opens an account with a forex broker and deposits 1.000
USD. His trading potential capability with margin is now
1000*100=100,000 USD. The trader chooses to trade EUR/USD pair at
1,2600. He sells. The trade is now being realized like this: 100
(traders' money)*100 USD=10.000 USD for this trade (100 of trader's
money, 9.900 broker's). After a while the trader experienced 100 pip
loss. These 100 pips accounts for 100 USD which are taken from his
account. The rest 9,900 USD of the forex broker account are remaining
untouched. If the trader closed his position in 1,2450 he would have
lost 150 USD taken from his account. 9,900 USD of the forex company
remaining as it was. The trader would have lost 150 usd which are used
as insurance or collateral from the forex broker to allow him to
sustain loss.
If the trader bought again in 1,2700 he would have a profit of 100
USD. The profit is always yours. Your money is used by the brokers as
collateral for the extra money they put in trade in order to allow you
to make more profit with less money. By this way you can get leverage
for your deals. If the leverage is 1:100 this means that for every
dollar you put in the trade the broker adds 100, and so on for 1:400
etc.
REMEMBER: Margin is the money of your account that broker uses as
collateral to trade more money in order to get more profit from your
trades with less money. This way you can trade e.g. 10,000 USD for
only 100 USD as margin. It is as if you temporally borrow money for
investment 100 times the value of your invested money using as
insurance the money you invest.
One trading contract is called lot. Lot sizes can vary depending on
your account. If you have a mini account the lot size could be 10,000
USD. If you open a standard account the lot size can be 100,000 USD.
You can trade multiple lots as long as you have the money in the
account to be used as collaterals for the margin. In a mini account of
1000usd initial deposit, you can trade a maximum of 10 lots for 10,000
USD per lot.
These are the basic knowledge one should master in order to start
trading forex.

Professional Forex Trader, Mentor and Coach, Guide You To Forex
Success - http://lmtmentor.key.to/
 




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