After finding out a glance about forex trading, you might be knowing how much potential profit you can gain in the forex market. You can money from forex trading and make your dreams come true.
Well, there is nothing wrong with all things about forex that you know and your big dreams likewise. Everyone has the right to have dreams to live better and become financially free.
But it’s just a piece of sweet things in the world of forex trading which is an ideal final goal for every trader. But when most of the forex beginners are being asked further what forex trading is about, they got confused. The following are some questions that most forex beginners answered wrongly;
- Is forex the same as a money changer?
- Is forex trading an investment like stock trading?
- How much profit can someone get?
- Is forex trading legal?
You might have a lot of questions pertaining to forex. So, the introduction to forex trading on this article will answer all of these questions and some other basic knowledge.
What is Forex Trading
To make it easy for you to understand forex, I will be analogizing the forex trading with a money changer or stock trading. Because most money changer and stock trading are more common.
When people answer a question about what forex trading is, each person may have a different answer. But I like a simple definition of forex trading; it’s an investment model in the form of paired foreign exchange trading. Forex itself has several other names such as FX, margin trading, or even forex trading. Forex stands for foreign exchange.
The profit in a forex trading obtained from the price gap between its buy price and selling price of the currency that we trade.
Forex trading example:
Last month John bought USD $1,000 at a buying rate of £0.7/dollar. And then, after waiting for one month, the USD exchange rate strengthened to £0.8/dollar. So, if John sells his Dollars at this price, he then earns a profit of (0.8 – 0.7) x 1,000 = £100.
Forex trading is nearly similar to money exchange at the money changer store. But there is a difference, which is forex trading is carried out margin trading method and there is no physical money exchange.
Forex trading is being traded in currency. For example USD/JPY that means it’s the exchange rate pair between the US Dollar and the Japanese Yen. There will be some abbreviations you will see in forex. So, if you want to trade forex, you have to understand their meaning.
Among investment instruments on the trading floor, forex trading is the largest instrument of its capital. The trade volume is around USD $2 trillion. That’s about 46 times greater than the commodity futures market (such as rubber, coffee, gold, oil, etc.). With that much capitalization, forex trading is known as the most liquid and largest trading market in the world.
Only 5% of the above funds are routine government funds. Another 95% belongs to forex traders from all around the world. It’s really the biggest and most diverse market. One of the advantages of forex trading, it opens 24 hours a day and 5 days a week. Unlike the New York Stock Exchange which can only transact during the day. But in forex (especially on online forex) we can transact anytime and anywhere.
Not all currencies can be traded in forex exchange. Commonly, only currencies from a few developed country such as USD, JPY, GBP, EUR, CHF, CAD, and AUD. And this is one of the differences from physical money changers in general. Traditionally, the currencies traded in forex trading are only currencies from countries which have fundamentally advanced with a large and stable volume of export and import. The next feature of forex trading is that it is never traded physically. But only the transaction proof is recorded when you make the transaction.
In earlier times, all forex transactions were written like securities. Then, after the widespread use of the telephone, the transaction proofs became smaller to just a short paper which was usually called as a quote. This is where the term Dealing Quotes (DQ) was born.
Now, forex trading is no longer done by telephone. It’s out of date. Today’s forex trading activities and their transaction proofs are carried out online. You simply register to get your user id and password on a forex trading platform or in this case it’s called as a broker. You can find a lot of popular forex trading websites on the internet.
This way of trading makes every trader easily makes forex transactions and, therefore, forex transactions are no longer limited by place and time. As all of the transaction processes are handled by the system and no longer through a telephone that is actually held by a human (dealer), investors can invest forex whenever they want 24 hours a day conveniently.
Even, I know some housewives who play forex trading from their home. You only need the internet connection and a computer or mobile device. From this device, you can analyze or read forex charts.
Margin Trading System
One of the most prominent parts in the forex world is the trading model that is carried out with a margin trading system. This is different from the trading system with the spot method that we usually do every day. Spot model of trading here means trading with a one-exchange system. It means that to invest as much as 10,000 pounds you are required to spend the same amount of money. Such way isn’t effective in capital and profit viewpoint because a currency price movement isn’t really significant per day. And spot trading model in forex requires a huge amount of money to make meaningful profits. That’s why you rarely find people who invest in foreign exchange using a trading spot model unless it involves very large funds. So, margin trading model eliminates this issue by using a leverage model.
With a margin trading, you don’t need to spend 10,000 pounds to buy 10,000 pounds. But you only need to issue the guarantee. How big is it? In the past, a guarantee of 10% was needed to get the whole section. It means that if you want to buy as much as 10,000 pounds, you can only spend 1,000 pounds. It’s considerably reachable compared to the spot trading method.
Some brokers or forex trading platforms even offer a guarantee as low as 5%. And finally, after the long competition among the forex brokers, most forex trading providers now provide a small guarantee as low as 1% or sometimes also written 1: 100. This ratio is what we call as leverage.
That leverage ration means if you want to buy as much as 10,000 pounds, you can only spend as much as 100 pounds. Much cheaper than the spot trading model, isn’t it? While the potential profit when you sell them back is a fixed amount. So, this way makes it possible to make a 100% profit (or loss 100%) in a day or even hours. Margin trading solves the unbalanced profit loss percentage. Logically, if margin trading can multiply your profits, it means that then margin trading can also multiply your losses as well. But again, with a good forex trading skills, it’s absolutely possible for you to get a hundred percent of profit in a single day, even more.