The basics of Forex, FX, foreign exchange
Forex, FX, and foreign exchange these all means the same thing. It is just the way different people would love to call it in the foreign exchange market. Most people involve in the foreign exchange market without even knowing. If you have ever travelled overseas to visit a different country and you have to change your currency to that of the country you are visiting, then you have traded FX
In foreign exchange, there are always two currencies involved and one exchange rate. (You cannot give more dollars in exchange for less the same dollar).
How to trade Forex (foreign exchange) the basic example 1
When a traveller leaves the United States to Canada, exchanges $1000 dollars at the airport kiosk, and receives c$1.250 (Canadian dollar). The exchange rate is 1.25 this is forex (FX), foreign exchange or what you call it.
If the traveller also made the same journey last year and had his money exchanged for c$1500 it means the exchange rate fell from being 1500 to 1250 and Canadian dollars. From this analysis, if you are to relate this to the forex market you will say the USD (United States dollar) has weakened vs. the CAD (Canadian Dollars).The exchange rate was done at 1.5 and the second was at the rate of 1.25.
How to trade foreign exchange the basic example 2
If a woman travels from the US to Canada, made foreign exchange at the rate of 1.5 gave $100000 for C$150000. The foreign exchange rate should be multiplied by the money she is exchanging $*1.5=C$. If the foreign exchange rate after a year is now 1.25, and the woman wants her money, back then CAD will be exchanged for USD.
The forex will be CAD divided by the exchange rate (1.25)=120000 looking at the forex analysis, she made a profit of $20000. Just by holding a stronger currency over a period of time, profit is being achieved in forex. Without the use of leverage, the woman was able to make $20000
How to use leverage
Leverage is a system that lets you borrow money such as margin and it helps to increase the potential profit likewise the potential loss. Currency traders in forex often use leverage. Leverage varies in ratio like the 100:1, 200:1 or higher.
You can also achieve the same 20% result (in the example above) with just $1000 if you use leverage. That is how leverage can benefit a trader.
It is very important that you know leverage is a double edge sword that can work in favor or against you. Therefore, in choosing your leverage, one has to be very careful. You do not have to use a high degree of leverage if you do not want to.
How differentiate foreign exchange (forex) and Stock market
- Information is readily available
- Guaranteed stops
- Superior leverage
- Strong and persistent trends
- Forex is not directional bias
- Forex has a tremendous liquidity
- The fx market is open 24/7
- You can trade forex from news and events
Foreign exchange is much more visible than stock because there is always an even that cause the market to change but in the stock market, there could be a great variation in the market and the reasons are not find.
Major Currency Pairs In forex
As we now know that foreign exchange, (FX) involves pair of currency and exchange rate, the country that is certain to produce more liquidity are:
- GBP-GREAT BRITAIN POUND
- USD-UNITED STATE DOLLA
- JPY-JAPANESE YEN
- CHF-SWISS FRANK
- CAD-CANADIAN DOLLAR
- NZD-NEW ZEALAND DOLLAR
The major pairs are:
For new traders, it is best to trade the listed ones above. There are a lot of pairs to explore.
How to trade fx-forex (EUR/USD)
Taking the EUR USD an example, EUR=BASE and USD=QUOTE
EUR is the base currency because it is the first member of the pair. USD is the quote currency because it is the second member of the pair. When the pair rises in the FX market, we say that the base currency is strengthening against the quote or counter currency and when the price falls, the counter or quote price is strengthening against the base currency.
Check more forex basics to learn more on how to trade forex