Introduction To The Foreign Exchange Market
January 5, 2010 by Forex Guide
Filed under Forex for Beginners
The term Forex stands for FO-reign EX-change. It is the huge trading market where there is only one good and that is money. In the forex market there is a continues buying and selling of foreign or domestic currencies. Euros for dollars, yen for pounds and so on.
The Forex Exchange, or forex, market is comparatively young, having begun in the early 1970s after the United States threw off the gold standard and domestic currencies began to fluctuate wide. For about 30 years before that, most countries had agreed to hold their currency rates balanced in regard to the U.S. dollar, making a forex market unessential. With that no longer the case, banks promptly recognized that a profit could be made in “buying” currency when it was devalued and “selling” it after it strengthened, just like any other good.
Money can be made because every day national currencies fluctuate based on forecastings of a country’s gross national product and other elements.
Take for instance some bad financial news from Britain. This means that forex traders will sell as much of their pounds as they can because of the bad news the pound is about to become devalued. When the pound is growing stronger again those traders will sell it for something else and making money with it.
Though the words ‘buying’ and ‘selling’ euros, dollars, yen and pounds suggest real physical transactions, in the case of forex those words are not to be taken literally. If you want to buy 200.000 pounds you don’t have to withdraw the same amount of US dollars from your bank and switch them into a big pile of pounds. These transaction are all done on paper but the losses and profits are very real.
Because of this paper business there is some room in the forex market for what is called ‘margins’ or ‘leverage’. In other words, you don’t have to put up the full amount of the position you are taking. Commonly the margin is 1% which means that when you put a $1000 into it, you get $100.000. Margins not only multiply your earnings but also your losses so you must be aware and careful when trading.
This 100:1 margin is based on the fact that in the world all major currencies fluctuate less than 1% a day in the forex market. In the stock market stock fluctuates more than 10% in one day. With changes that small your losses or earnings with a starting investment of $1000 are almost undetectable, commonly around $10 loss or profit. By multiplying it by 100, the
earnings and losses in the forex market are more noticeable.
With leverage aplied in this manner, the basic “lot” for buying and selling currencies is usually 100,000 (which of course only costs 1,000). Most companies that handle day-trading on the forex market don’t go under this amount.
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