FOREX – What is it? How does it work?

FOREX – What is it? How does it work?

What is Forex?

The foreign exchange market or FOREX is the world’s largest market in terms of the amount of money traded every day, with more than 5 trillion dollars traded daily.

To get an idea of the size of the daily transactions, we can compare FOREX with the American stock market that trades about 60 billion USD compared to the more than 5 Trillion USD traded in FOREX.

It’s a market that is continuously open, 24 hours a day, between 10:00 pm GMT on Sunday and 10:00 pm GMT on Friday.

The FOREX schedule allows for a higher trading volume and more time to trade which increases the overall volume and allows more trades and thus more profit.

Since 2004 the FOREX market has had exponential growth, with the appearance of online Forex brokers, and with the development of an online platform with the name MT4 that revolutionized trading, offering customers a practical, simple and understandable way to trade.

Currently, Meta Trader 4 is used by most Forex brokers and is available for Android and IOS. Today, as long as we have Internet access, we can be linked to the market and trade anywhere and anytime. The MT4 platform is free and very lightweight.

How do you trade in FOREX?

Forex trading involves the purchase of one currency and the simultaneous sale of another, that is, currencies are traded in pairs, for example, the Euro and the US dollar (EUR/USD). The investor doesn’t physically buy dollars or euros, but rather the monetary exchange relationship between them.

So, when someone makes a trade in this market they are not buying a particular currency, but a given PAIR, an exchange rate between the two currencies.

With the fluctuation of the rates and the relative value between the currencies, different investment strategies, which can result in profits or losses, can be structured.

Typically, exchange rates do not vary dramatically in a short time, which should raise doubts about the veracity of the promises of high profitability that often accompany the FOREX investment offers.

Download several useful files totally free here: FREE MATERIAL

Then how is it possible to have high profits in this market?

The answer is in using a margin account to trade. A margin account is essentially a short-term loan taken by the investor from the Forex brokers.

Since the trade is settled only with the difference between the values of the different currencies, it is not necessary that the investor has the entire amount of the trade available in the account.

For FOREX trading you can effectively deposit just a portion of the amount to cover the daily variations in the currency pairs.

Margin accounts give the investor more power to trade; an investor can place larger trades. Most of the Forex brokers use a 100:1 margin, which can go up to 500:1.

In the case of a 100:1 margin, a trader can place a 100,000 USD trade with only 1,000 USD in the account.

This structure allows greater profits, BUT IT ALSO ALLOWS GREATER LOSSES. The logic is the same, in fact, because the value that you can negotiate with a particular investment is multiplied, so too are the positive and negative results. In this sense, the ideal is to always use only a small part of the available margin.

This way if there is a change in the market you are not subject o major losses.

Here is an example of a FOREX margin trade.

Forex Example

In the previous example, if an investor had bought euros (1.0500), and then sold (1.0550) when they increased, he would have gotten a modest return (less than 0.5%, or $400 on $105 thousand).

In addition, it would have been necessary to pay $105,000. An amount that is out of the reach of the vast majority of individual investors.

However, with a margin trade, the investor could have invested much less. If the required margin is 0.5% or a ratio of 200:1, in the above example the trade of approximately $100 thousand could have been made with a deposit of just $500.

So, if an investor had to invest the entire value of the purchase of the currencies, and considering the variation between them, the gross result in the above example would be under 0.5%.

However, if the investor was able to purchase the EUR/USD pair with just $500, the result would represent a gross return of 80% in the same time period.

BUT THE LOSS COULD ALSO HAVE BEEN 80%. That is, if the value of the EURO had not risen, the $500 would have been reduced to $100, resulting in a loss of $400.

The FOREX market has a high potential for gains due to the use of leverage (margin), but you should always keep in mind that it is preferable to trade small lots (micro or mini lots), and thus have lower profits because this way you considerably reduce the risk in your account.

Alternatively, the vast majority of Forex brokers offer account management services where you pay a percentage of the profits in your account for these services.

Handing the management of the account to a professional turns out to be an excellent solution for investors who do not have the time or inclination to learn to trade in FOREX because the investor only pays when the Forex brokers gets results.

In practice you’re not paying the Forex broker, rather the profits generated by the Forex broker are paying him for his work. This way you can have interesting results that are usually far better than what is offered by savings accounts and other more traditional investments.

For those who are interested in trying it out, there are many Forex brokers with interesting offers that range from deposit bonuses, real accounts to manage without having to deposit, or a 30-day period without risk, in which the Forex broker is responsible for losses that occur in your account.

Now that you know what is Forex, you understand that is a good way to generate important revenue and diversify your sources of income. Diversification in itself is a way to decrease the overall risk of an investment portfolio.

FOREX and the Robots:

There are also automated systems, called EAs or Robots, where everything is done automatically in your account. Learn more about these ROBOTS.

This solution for those who have no knowledge is one of the most used, and currently, a large share of all transactions in this market today, or are made entirely via these Forex Robots or at least partially with the use of semi-automatic systems, also called Forex Signals which is a service we also have.

Forex and Binary Options:

If you have found this market complicated, there is a recent new instrument on the market (it was only regulated in 2012) called Binary Options.

Binary Options use some of the features of Forex, but trades are simpler to understand and do than in Forex. See this article for a COMPARISON between Binary Options and Forex.

If you would like to try a free Binary Options broker account, click on the Banner below and try a free demo account:

FOREX - What is it? How does it work? 1

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