What is Forex?
Forex (FX, Currency Exchange, Foreign Currency) is the most traded and liquid global marketplace with transaction numbers each day surpassing four trillion dollars. Seen as an OTC marketplace (Over The Counter) there’s no centrally regulated exchange, and the market consists of different categories like Retail and Institutional Investors, Brokerage, Liquidity Providers, Financial Institutions and Hedge Fund Entities.
How to trade Forex
The simple trade is made up of the relative shift of the exchange rate amid a couple of currencies. Trades are made in pairs, for instance, the EUR/USD (Euro vs. US Dollar). Price quotes are shown as the exchange rate for the currency pairs. For instance, you could see a price shown like this: EUR/USD – 1.2152. It shows that one euro is worth 1.2152 dollars.
PlusMarkets is a five-digit brokerage, thus all prices are quoted to the fifth digit, letting fractional pricing and smaller spreads.
In the EURUSD instance we mentioned, the EUR is in the position of the Base Currency. The USD is in the position of the Quote Currency.
FX currencies are traded in Lots. A Standard Lot equals 100K units of the base currency and the identical worth of the quote currency.
Staying with the EURUSD instance with the pricing at 1.05000, a Standard Lot is then going to be the exchange of 100K euros for 105K dollars. Trades may be performed in fractions of standard lots. For instance Mini Lots that equal to one tenth of a standard lot or 10K units of the base currency and even Micro Lots that are equal to one hundredth of a standard lot or 1K units of the base currency.
Standard Lot = 100K units of base currency
Mini Lot = 10K units of base currency
Micro Lot = 1K units of base currency
Returns on Forex trades make a Round Trip – opening a trade in one direction then exiting it in the other direction, the direction being BUY (Long) or SELL (Short).
As we have seen in the instance, the cost for the pairing is 1.05000. If one believes the euro will appreciate in value against the dollar, one will enter a BUY trade.
If one BUYS 1 Lot of the pairing they “own”* 100K euros and “owe” the marketplace 105K dollars.
If the Buy estimate was correct, and the euro climbs in worth and the rate stands at 1.07000. To exit the trade, one needs to sell the 100K euros for 107K dollars, which would be covering the worth one “owes” the marketplace for a potential profit on the trade of 2K dollars.
If one thinks the euro will depreciate against the dollar, one will SELL 1 lot of euro at the 1.05000 price, leading to them “owing” the marketplace 100K euros but “owning” 105K dollars.
If yet again, the prediction was right, and the euro does depreciate against the dollar, going down to 1.03000. The 105K dollars now has the value of 101,941 euros (105K/1.03000), giving one a potential 1,941 euro trade return. On the other hand, in case of opposite scenarios, where the market moves against our predictions, this could lead to equivalent potential losses.
*CFDs are only settled in cash with no physical delivery of the underlying asset