Currency trades are always done in pairs between the currencies of two different countries. Below are listed two sample currency pairs.
Name ---------- Bid ----------- Ask ---------- Change ---------- %Change ---------- High / Low ---------- Time
EUR/USD -----1.1901----- 1.1903 --------- -0.0091---------- -0.76% ---------- 1.2024/1.1891 ---------- 15:26
GBP/USD -----1.7439----- 1.7442 --------- -0.0004---------- -0.02% ---------- 1.7573/1.7410 ---------- 07:01
Taking the one listed in the first line, let's look at how a sample Forex investment might evolve over time.
Interpreting Currency Pairs
As shown in the price listing, the ask price for the EUR/USD currency pair is 1.1903. Remember the ask price is that at which brokers are willing to sell the base currency (EUR). In this example that means we can buy the base currency (EUR) for $1.1903.
The bid price is listed as 1.1901. Remember the bid price is the price at which brokers are willing to buy the base currency (EUR). In this example that means we can sell the base currency (EUR) for $1.1901.
Can You Get Into The "Game"?
It used to be that in order to get in the game, you need to be able to fork out enormous sum of money. In theory, you have to shell out about US$119,030 to purchase one standard lot of 100,000 euros. While that to professional currency traders is peanuts; to the average investor interested in Forex trading, it's huge. With more brokers offering 'mini' accounts, more people are now able to invest in Forex. Mini accounts come in much smaller standard lots, such as 10,000 units.
Even at 1/10th the standard size, that can still a substantial investment for many investors. Even professionals will balk at having to come up with the full cash amount for large trades. Luckily, leverage comes into the picuture.
What is Leverage
Leverage is the ability to control much more than you own. Forex brokers 'loan' an investor typically up to 90% or more. It isn't technically a loan. The 10% or less actually invested is regarded, in the industry and in law, as a 'good faith deposit'. The investor is technically on the hook for the other 90% or more, but it's very rare to press an investor for the money.
Instead, if the price direction moves in an unfavorable direction (for the investor) by a large enough amount, the broker simply liquidates the position and the investor loses! It's important to realise this! A good broker will usually give the client a margin call and give him or her the option to input enough fresh cash to cover the shortfall.
Currency prices can change by significant amounts very quickly (that's called 'volatility'), though, so be prepared.
What might that look like in a realistic scenario?
Let's look at the above example EUR/USD 1.1901/03. Bid price is 1.1901 and ask price is 1.1903 and suppose trades are done at 1:100 (1%) leverage. You decide to buy EUR. In the case of 1 standard lot of 100,000 units, you put up 1% of $119,030, or $1,190.30.
Let's take a look at the profit potential.
Suppose the market moves to EUR/USD 1.1907/09. If you sell the euros at this point, the bid price will apply. In this case you make a profit of ...
$119,070 - $119,030 = $40.
That doesn't sound like much, but observe two things.
One, the initial investment 'out of pocket' was only $1,190.30, and 1% of $119,070 = $1,190.70, only a 40 cent! difference ($0.4). Yet the actual profit was 100 times that, $40. That multiplier effect on the actual profit is the result of leverage.
Second, price changes of a few pips can (and often do) happen in minutes in the Forex markets, and getting in and out doesn't cost a formal commission. Brokers make money off the spread. Investors can get in and out quickly and accumulate large amounts of profit (or loss) in one day. Or, they can wait for wider swings - which also often happens in relatively short periods.
Welcome to the roller coaster world of investing: Forex!
If you would like to further your investment knowledge, I would highly recommend that you read this book-
Trading for a Living by Dr A. Elder.
Quick Forex Tip #1
Forex trading is the largest known financial market. Day or night, it doesn’t really matter; the trade goes on even as half of the world is asleep. It offers a lot of opportunities for many organizations and individuals to make profit. There are many day traders in the market, and if you think you can do it, why not join the day traders. |
Quick Forex Tip #2
Don’t let your emotions rule you, especially when you're making trading decisions. A successful Forex trader should always be disciplined, and once you attain your objective, leave the market. Many times, people plunge in deeper because they are influenced by greed and fear. Don't be like them. |
Quick Forex Tip #3
Getting a good education about Forex trading will also let you increase your chances of profiting and decrease the risks involved. In getting the proper education in Forex trading, you will also learn how to read Forex charts. Forex charts are one of the most important things you should learn in order to successfully trade in the Forex market. Without this knowledge, you are doomed to fail in this very liquid market. |
