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What is Forex ?

What is Forex ?

What is Forex?

In simple terms Forex is the foreign exchange market, FX or currency market is where one currency is traded for another. It is a decentralized global market where all the world’s currencies trade. It is one of the largest most liquid market in the world with daily trading exceeding $5 trillion. It does not have a central exchange as it trades over the counter and is active 24 hours a day, five days a week.

What Happens when I trade Forex?

If you have ever travelled overseas then you have made a Forex transaction!

A vacation to USA and you have to convert your euros into dollars The exchange rate between two currencies is based on supply and demand. This determines how many dollars you get for your euros

For example, if one euro can buy you $1.30 on Monday, on Tuesday, it might buy you $1.32. This might not seem like a big deal just to someone on vacation but to a large international company it can make the world of difference. In simple terms exchanging one currency for another costs more depending on when you do it. These pennies add up quickly, so whether you are a holiday maker or a business owner it might pay to wait until the exchange rate is more in your favour

What is an exchange rate?

Like we said there is no centralized depository or exchange in order to conduct transactions. Transacations are conducted in several locations by several market participants. Any two currencies will very rarely be identical to one another in value and also very rare that two currencies will maintain that value for more than a short period of time.

Why do exchange rates change?

Just like stocks, bonds, cars, computers and many other goods and services, currencies trade on an open market. As supply and demand fluctuates a currency’s value fluctuates. A decrease in demand or an increase in supply can cause a currency’s value to fall. Just as an increase in demand or a decrease in supply can cause the currency’s value to rise

Elements of a Forex Trade

Because you compare one currency to another, forex is always quoted in pairs. For example EUR/USD at 1.40 shows how much one euro (EUR) is worth in US dollars

What is a Lot?

This is the smallest size of trade available. However, account holders can place trades of different sizes as long as they are in increments of 1000 units i.e. 2,000, 3000, et.c.

What is a Pip?

A Pip is the unit ithat you count profit or loss in. With the exception of the Japanese yen pairs, most currency pairs are quoted to four decimal places. The fourth spot after the decimal point (100th of a cent) is typically what you would watch to count “PIPS” Every point that moves in the quote is 1 pip of movement. i.e. EUR/USD 1.3542 to 1.3547 then it has risen by 5 pips.

What is Margin?

In order to open a new Forex account you need an Margin amount. This is not a charge to your account, nor is it a fee. It ensures that you have a sufficient account balance relative to the size of your position. Margin is the inverse of leverage

What is Leverage?

All trades are executed using borrowed money, and this allows you to take advantage of leverage. For example if leverage is listed on USD/EUR as 500:1 then traders can trade up to 500 times the equivalent amount of USD they have in their account. So if a trader puts on a one lot position in USD/EUR (where one lot equals 100,000 USD) then a traders margin requirement is 200 USD. This means that a trader must have 200 USD (or equivalent in another currency) to open a 100,000 USD position. If however the floating value of a trader’s account falls below their margin requirement then the broke may opt to close the position.

If you are a newcomer to forex then it’s best to start small. Trade with lower leverage ratios until you build the confidence to trade with larger ratios. For example: Start trading with a 50:1 leverage with $1000 in the market while only setting aside $20 in your trading account

Leverage however must be used with care and caution as significant leverage can easily result in great losses just as it can in great gains

Forex never sleeps!

Like mentioned before Forex trading goes on all around the world during different countries business hours. You can trade major currencies 24 hours a day five days a week.

Go Long or Short

Forex is unlike other financial markets where is can be difficult to sell short. Subject to available liquidity there are no limitations on shorting currencies. In simple terms if you think a currency will fall, sell it and if you think a currency will go up, buy it. In forex there is no such thing as a ‘bear market’. You can make or lose money at any time.

Unmatched Liquidity

Forex is now trading close to $6 trillion daily. There are always a lot of people trading and this makes it very easy to get into and out of trades at any time.

International Exposure

As the world becomes more and more global, investors are always hunting for any opportunity. Forex is an excellent way to gain exposure whilst avoiding foreign securities laws and language problems

For more information and guidance get in touch with our lawyers or email iMPK Global Business Law Firm – Cyprus Lawyers – Michalaki, Pitsillidou & Co. LLC, at info@impklawyers.com .Tel. +357 99345000 – Fax +357 25 660097.

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