Trade Forex at trade-oro.com
Forex is one of the cornerstones of the financial market.
What is Forex?
The abbreviated version of the word "foreign exchange" refers to Forex trading. Unlike stocks, bonds or commodities, currency do not trade on exchanges as there aren’t any central exchanges for forex.
Currencies are traded 24/5 and are easily obtained due to their high liquidity.
Let's illustrate a simple example so you may understand the fundamental difference between all the other derivatives to FX:
You are flying to the U.S from the U.K and upon your arrival at the U.S you notice that you don't have any USD.
The first thing that you will do is to exchange GBP to USD right? regardless of the time or the rate (GBP/USD) you will be able to exchange your GBP to USD.
Theoretically, selling GBP and Buying USD will make the GBP/USD rate to decline, thus strengthening the USD while weakening the GBP.
What we have learnt from the example is:
• Regardless of the rate of the currency, the bank is forced to sell you even if they don't want to.
• Regardless of the time, you can always buy and sell currencies (unlike stocks, bonds and commodities), even when most of the banking system is not operating.
Advantages of Forex Trading
• The only cost of trading is the spread, as opposed to other types of trading instruments that charge commissions and other finance fees.
• Low Capital Requirements- you can trade forex with a small account of $10k, unlike other financial instruments that requires $50k as the minimum.
• No Central Exchange- it is impossible to manipulate the FX market
• 24/5 traded market.
• High liquidity
What is the Size of the Forex Market?
The daily average volume per day is about 9 Trillion Dollars, which makes the FX market the biggest traded market in the world. Forex Market Terminology Every pair that you trade will be made of two currencies. The “prime”, which is the currency of the left side, and a “sub” which is the currency of the right. For example, if you trade EUR/USD you will be referring to the EUR as the “prime” and to the USD as the “sub”. When traders talk among themselves they will say: “the EUR/USD went up by 100 pips today”. What does it mean? It means that the EUR got stronger compared to the USD, but it can also mean that the USD became weaker compared to the EUR at the same time. This might seem confusing at first, but remember that any pair can be discussed from both sides of its currency perspective. For instance, if you will talk to a trader from the U.S about the EUR/USD, he might not understand you at first, since the U.S trading market tends to put the USD as the “prime” instead of the “sub”, which means that for Americans it’s not EUR/USD, but rather USD/EUR. Long, Short, Buy or Sell? Which is it? When you click on the “Buy” or the “Sell” button on your MetaTrader4, you are not buying or selling anything at all, in fact you are borrowing and lending money. Confused? Let’s elaborate a little bit on the topic before continuing on. When you "Long/buy" the EUR/USD, you're not converting any Euros to American dollars, in fact you are borrowing EUR and lending USD. Let's look on the same example but this time we will be Shorting/Selling the EUR/USD. When you are Shorting/Selling the EUR/USD you are essentially borrowing USD and lending EUR. This topic will be much clearer when we get to explain how SWAP works and calculated, so remember for now that you are borrowing and lending instead of buying and selling. Bid, Ask and the Spread There will always be two prices in the quote area: The “Bid” and the “Ask”. The ask price is used when buying (borrowing) a currency, while the bid price is used when selling (lending). Pay attention that the ask price of any financial instrument is always higher than the bid price. The reason to this is the bank. Remember that the bank is forced to sell you at all time regardless of the market price? To avoid a negative balance, the bank will always buy (allow you to borrow) your currency a bit cheaper and sell (allow you to lend) it to you at a higher rate. The difference between the ask and the bid is the spread. How does SWAP works? SWAP is the interest paid or earned for holding a currency pair position overnight. Every currency without exception has an interest rate attached to it. The FX market is traded in pairs, which means that every trade involves two different interest rates. If the interest rate of the currency that you borrowed (bought ) is greater than the interest rate of the currency that you lent (sold), you will earn a positive SWAP. However, If the interest rate of the currency that you borrowed (bought) is lesser than the interest rate of the currency that you lent (sold), then you will have a negative SWAP. Here are two examples to illustrate how it works: 1) One Lot (100,000) USD/TRY held as a LONG for one week (168 hours). 2) One Lot (100,000) USD/TRY held as a Short for one week (168 hours).