The Foreign Exchange, often referred to as the Forex or FX, is the
world’s largest financial market, with approximately 3 trillion dollars
traded daily.
The "goods" traded are currencies of various countries, with the
majority of the action involving the so-called majors currencies:
the United States dollar (USD), the European euro (EUR), the Japanese
yen (JPY), the British pound sterling (GBP), the Swiss franc (CHF)
and the Australian dollar (AUD). Gold and silver are also popular
trading instruments.
With the explosion of internet usage, the Forex market has become
accessible to almost everyone.
Leverage
Because of the Foreign Exchange’s relatively volatile nature, and the
corresponding potential for very high profit, investing in the Forex
market might be considered a form of speculation. The highly leveraged
financing commonly offered by Forex operators allows traders
extremely high potential profits with a comparably small amount of
capital investment.
In Forex, clients are offered leverage as high as 1:200, so the client
must invest, in this case, only 1/2 percent of the position they would
like to buy. In practice, the trader uses a credit, and covers only the
risk of the operation (the percentage of presumed currency volatility).
For example, suppose a trader utilizes a 100:1 leverage, and buys a
contract valued at $100,000 with an investment of $1,000. With a 1%
increase
in the position, the trader would make a profit of $1000, or a 100%
return on investment.
Spread
Obviously, brokerages make a commission for every trade executed, which
is generally factored into the prices quoted in the form of a "pip
spread".
This cost is very small, usually 0.0003 of a unit or, in Forex lingo,
three pips. Three pips is equivalent to three-hundredths of one penny.
Of course, when trading extremely large amounts of currencies, this can
add up.
For example, if a currency pair is quoted as EUR/USD 1.4000/1.4003, the
price at which a broker will sell (Ask) one EUR is 1.4003 USD,
while the price at which a broker will buy (Bid) one EUR is 1.4000 USD.
The price difference is the broker’s profit. With such a pip spread,
the cost of buying one lot (USD 100,000) would be USD 30.
Of course, a lower spread is better for the client. If the position
above increases by 10 pips, to 1.4010/1.4013, a trader would earn seven
pips,
having bought the position at 1.4003 (broker’s selling price), and
selling at 1.4010 (broker’s buying price).
Internet Forex Platforms
Today, anyone with an Internet connection can exploit the Forex market
utilizing Forex trading platforms, computer applications that enable
you — in few simple steps — to buy and sell currencies. These online
brokerages provide trader’s the real time information needed to make
informed
decisions, and the technology to instantly execute trades.
This site offers useful information about the Forex market, helping you
gain the practice, information and knowledge necessary to become
a successful trader.
