Put simply, Forex (Foreign Exchange) is an on the spot purchase and sale of one countries currency for that of another country. In fact, Forex trading is very similar to the ‘trades’ that we all make on a daily basis. For instance, an American traveler in Europe cannot purchase products in U.S dollars (USD), they will need to exchange their (USD) into the currency of that home market. In the case of Europe, it would be (EUR). This simple trade is essentially a Foreign Exchange. By selling one currency, you have received the equivalent amount in the bought currency. Depending on the currency exchange rate, or simply put, how much you will receive in the purchased currency, you may have gained or lost in the value of the new currency that you now own. This is due to the fact that the value of any single currency is never static and fluctuates all the time. The art of making money is deciding when to buy and when to sell! The Forex market is by far the largest in the world with daily trade reaching approximately four trillion dollars.
Basic Mechanics Of Forex:
Forex traders usually deal with 4 major pairs: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to sign these pairs accordingly. These major pairs are considered as the Forex market’s "blue chips”. Of course, there are many other pairs, however, these are the most popular ones.
So we have the major currency pairs, how do we now make a profit? There are always two numbers given after the currency pair, the first always has a smaller value then the second, for example, (EUR/USD 1.2330 1.2333). The first number is known as the "Bid" or "Sell" and the second number is referred to as the "Ask", the "Offer" or "Buy". It is the difference in price when buying or selling these currency pairs that makes you money.
The Bid or Sell number represents that price where one can sell the major currency and buy the secondary currency. If we refer to the example above, this is the price at which one can sell the EUR and buy the USD. The Ask/Buy number represents the price where one can buy the major currency and sell the secondary, in this example the price at which one can buy the EUR and sell the USD.
What Is a Forex Brokerage?
A Forex brokerage is a tool that connects Forex traders with the Forex market. The Forex market is traded on what is referred to as an "interbank". In short, banks trade electronically with each other at various prices. A Forex brokerage, connects you to the banking network and allows you to purchase currency pairs. Before there were Forex brokers, people wishing to trade in foreign currency needed to have a large amounts of money to invest which needed to be done through the banking system.
A very large advantage of trading through a Forex broker is something referred to as leverage. Forex Leverage or Leverage simply refers to the amount of money you are allowed to borrow from the broker when you open a position (a currency pair, stock or commodity). If we take the Stock market as an example; when you buy 100 shares of a company trading at $10 per share, you have $1000 in shares. Some stock brokers would let you borrow money from them, generally up to 80% of the total stock value. So instead of $1000 you are now only required to have $500. This helps traders to buy more shares with same amount of money. However, the stock broker will charge you interest on the money borrowed.
Forex Leverage is similar except on steroids! When you use leverage, you can control a larger amount on the market than what you actually have in your account. For example, if you are trading on a leverage of 10:1, you can trade $100 on the market with only $10 invested. Typically, Forex brokerages will offer leverage up to 1/500 which means potentially huge profits for little invested. Likewise, you also stand to lose your invested money a lot quicker.