Forex is where all currencies of the world, in other words all of the world’s money, is exchanged, and, of course, it is money that is used to buy and trade everything. Forex is the mother of all markets, because any major economic and political event is reflected through the value of the currencies it affects. Because of it’s sheer size, the worlds wealthiest people have flocked to Forex and this market has since become a place where billion dollar personal fortunes are made in months, sometimes weeks and in one noteworthy case, in one day. (Google this later if you’re so inclined).
Here’s where things start to get very interesting. Up until fairly recently, Forex was reserved only for the largest banks, and the super wealthy, with a minimum of 10 million dollars needed just to open an account, and where no transaction under a billion dollars had much significance.
Alright. Let’s Talk Turkey… Here’s How Forex Traders Bring Home The Bacon.
It’s all about banking PIPs! As a Forex Trader your goal is to capture as many PIPS as possible by trading in the direction of the market. So it’s pretty important to have a good understanding of what a PIP is. Perhaps the easiest way to understand what a PIP is, is by looking at a quote for a currency pair. If we take a look in the Quotes Module of the Automata FX platform, we can see the quotes of the various traded currency pairs. We’ll just focus on one of these.
It’s important to note that the first currency of a pair is the base currency: this is the main unit that traders buy or sell. The second currency is the secondary or counter currency against which they trade the base currency. The base currency has a value of 1.0 and the second currency is quoted as a number of units against the base currency. Taking a look at the highlighted pair in the image above, the first thing you will notice is that there are two values noted for the pair. The price on the left is known as the “bid” price or the “sell” price while the price on the right is the “ask” price otherwise known as the “buy” price. So obviously, these are the prices available to you based on whether or not you want to buy or sell the pair. The next thing you will probably notice is the fact there is a difference between the price on the left and the price on the right. This difference is known as the spread. Simply put, the spread is the fee that forex brokers “charge” in return for facilitating the trade through their network. In this case, the spread is three PIPs. So, the PIP might best be described as the smallest unit of movement in a currency pair and You’ll notice that the spread in this pair is equal to .0003 of the currency. Since most major currency pairs are priced to four decimal places like this, the smallest change is that of the last (or fourth) decimal point – for most pairs this is the equivalent of 1/100th of one percent, or one basis point. There is one exception to this, however. The Yen is actually quoted only to 2 decimal places.
You’re not impressed are you? It doesn’t seem like it could add up to very much money does it? At this point it’s always helpful to go over an example to illustrate why someone would want to trade currencies when on the face of it, it doesn’t appear like it could be very lucrative.
So, let’s say you are trading with dollars and you want to buy 10,000 euros. Let’s also say that the current quote for the Euro versus the US dollar is 0.7415. This means that you would have to spend $13,486 to buy 10,000 EUROS. The formula looks like this:
This is calculated as follows:
1 euro / by the exchange rate = the amount of dollars needed to acquire 1 euro. Then we multiply this amount by the number of euros we want and we get the amount of dollars this will cost us.
(1 €/0.7415)= 1.348618 X 10,000 = $13,486.18
Lets now say that while we were doing this calculation, the exchange rate for dollar versus the Euro increased by just one PIP to 0.7416. Thus increasing your buying power and reducing your cost. So now the calculation is as follows
(1/0.7415)= 1.348436 X 10,000 = $13,484.36
So you saved $1.82 on this transaction from just one pip. Still doesn’t sound like much money does it. Okay well here’s where things actually get pretty interesting. Most brokerages permit leverage in the currency market of 50 to 1.At some brokerages it can be as high as 100 to 1. Let’s just assume you’ve leveraged your position at the rate of 50 to 1. Now this one PIP difference means a total difference of $90.93. Now consider this, the average daily range for this pair has been well over 100 pips over the last few years. Assuming an average daily range in price of just 100 pips, this would mean that the possibility exists for a trade like this to yield as much as $9,000 in a single day. Now look, trying to make trade like this carries a lot of risk, because the market swings in both directions and leverage can multiply your losses as easily as it can multiply your gains, so understanding money management and strategy is critical to any trader’s success, but this illustration shows why people are finding Forex to be an incredible opportunity. Additionally, this illustration really only shows how one would make money when the market for the dollar against the Euro is increasing. This would be referred to as going long on the US Dollar/Euro, however, if the market were going the other direction, we could place our trade to “short” the dollar/euro or any pair for that matter.
Let’s Briefly Talk About The Reasons That Prices Move
The underlying cause of a price movement in any market is typically based in the fundamentals of that market. For many markets, the focus is on supply and demand as free-market forces determine what is considered to be either “expensive” or “cheap” depending on how much of the item is available and how badly someone wants to buy or sell it.
Forex markets are no different than any other market in this regard, because the supply of a currency, and the demand for it, are certainly a concern when determining a value of a currency. So, for instance, if lots of people all over the world wanted to buy American goods, then they’ll need U.S. dollars to do it and this demand for U.S. dollars would have a positive impact on the value of the dollar. However, Forex markets actually go far beyond basic supply and demand figures. Everything that affects the political and economic situations of the two nations involved in a Forex currency pair has some bearing on the value of the two currencies against each other.
Many traders today find that the long list of fundamentals that affect Forex trading can be rather daunting and instead prefer to trade on technical analysis – a study of price action that can be applied to any market. Technical analysis combines the influences of all the fundamentals affecting a market into one element, which is the current price. Rather than keeping up with all the various fundamentals, traders can focus on analyzing just one element – the price movements on a chart, knowing that the price synthesizes every factor known in the market at the present time — at least, in the perception of traders. Thus, the price is the visible reflection of all underlying market forces affecting the market. As you continue learning about trading you will undoubtedly encounter trading gurus who will exclaim that “nothing matters but price” and we would have to agree with them.
Why Is Forex Suddenly Growing In Popularity
At the present, there are still a lot of people who have heard about stocks, bonds, options and even commodities but haven’t heard of Forex. This is simply because, up until rather recently the average person could buy stocks or a bonds through their broker, but couldn’t trade currencies. Up until rather recently there really wasn’t a means to do so for the average trader, whereas many of the world’s largest banks, hedge funds, and insurance companies have actively traded currencies with each other for profit for many years. This has all changed with the explosive growth of the internet and use of the PC. With the expansion of the use of the personal computer in households all over the world, the forex market finally became accessible to anyone with an internet connection, and as a result, the news of the opportunities this market holds is rapidly spreading to all corners of the globe. And because there are some fantastic benefits to this market, like the fact that it’s a 24 hour market, rather than the stock market with it’s more limited trading hours, and the fact that there are just a handful of major currency pairs to evaluate compared to thousands of stocks, the popularity of Forex trading is exploding.
The advantages of trading Forex are clear and we’ve only touched on the basics here. There are so many more. So be sure to register for access to both our software, so you can see our strategies pulling profits out of the markets in real time, and to receive our newsletter to learn more about the incredible opportunities this market has to offer.
