There are high chances you have heard about Forex. You know it is some kind of a market, but not sure how it exactly works. So here are some major concepts to grasp related to the Forex market. Take a look at Forex Heatmap
Currencies are quoted in “pairs.”
Forex is one of the most prominent financial markets where you can profit from trading various currencies. Unlike other financial assets, currencies are quoted in pairs.
Therefore, whether you buy or sell a currency pair, you are betting on the rise of one currency and simultaneously on the fall of the other currency.
Example of a currency trade
When you buy EUR / USD, you are betting on the rise of the Euro against the dollar, which means that you are also betting on the dollar’s fall against the Euro. Therefore, the motivations for buying EUR / USD can result from either a bullish trend on the Euro or a bearish trend on the dollar.
Spread instead of transaction fees
The quote (price) of a currency pair at a specific time differs depending on the direction of the transaction: Buy or sell.
The difference between the Buy Price (Ask) and the Sell Price (Bid) is called the spread.
Therefore, in this example, we say that the spread of the EUR / USD pair is one pip.
In practice, it means that if you place a buy and then close that position immediately without moving, you lose 1 pip, just as if you place a sell and close it immediately.
It also means that when you buy, your position starts to pay off after going up 1 pip (and after going down 1 pip if you have decided to sell).
This difference, which is called the spread, constitutes the profit of your broker. Always read the broker review to check the spreads, minimum deposit amounts, types of accounts offered.
The average spread is one to two pips. But beware, some brokers apply a spread of 3 pips! Remember, the lower the spread, the better!
You can trade amounts much greater than your capital thanks to the leverage effect.
The currencies are traded in “lots.” The minimum lots on Forex are 1000 units, which is 1000 dollars as far as EUR / USD is concerned, but that does not mean that you have to have this amount in your account to take the position. .
And that’s where the famous “leverage” comes in, one of the main advantages of Forex trading.
Simply put, leverage gives you more money to invest in Forex than you have in your account.
For example, a leverage of 100:1 means that you can invest in amounts 100 times greater than what you deposited in your trading account.
With $ 1000, you can invest an amount of $ 100,000 if you have a leverage of 100.
This is indeed where one of the main advantages of Forex lies, and it is thanks to leverage that Forex is a market that can (on paper) make you rich overnight, even with a small initial stake (extremely rare in reality, but theoretically possible).
It is also because of the very high leverage offered by Forex that it is considered an ultra speculative market and very risky for the uninitiated.