A look inside the world of Forex
What is the biggest trading market in the world? Stocks? Options? Futures? Not exactly. Trading currencies is actually the biggest trading market in the world. In fact, trillions of dollars are traded everyday by speculating on the prices of currencies. What is interesting to see is that you can trade a whole lot for just a little in the currencies market, thanks to the extremely high leverage ratio of 1 to 100, meaning you can control 100 dollars of something with only a 1 dollar. Here is how it works: you pick a currency you like or want to trade. I will be using the US dollar, since its familiar to me. In the currency or the Foreign Exchange ( “Forex”, get it?) market, you trade one currency against another currency; basically you trade in pairs meaning you sell one currency while simultaneously buying the other. So for example, you could trade Euro:USD . If you “bought” this pair you are buying Euro and selling the dollar. If you “sell” this pair, it would mean that you are selling the Euro and buying the Dollar. Quotes for this example would be displayed as EURO:USD 1.4569 meaning in the market 1 Euro is worth 1.4569 dollars. Profit and loss in the forex market is determined by how many “pips” the currency pair price has moved. A “pip” is usually 1/100 of a percent or 0.0001 change. Calculating the profit or loss is actually very simple. Lets say you buy 100,000 euros ( you arent actually buying anything in real life though) for $145,690 ( you get that number by multiplying 100,000 euros by the 1.4569 euro-dollar factor I made up). If the currency pair price increases by 20 pips, the new price would then be EURO:USD 1.4589. Your 100,000 euros ( remember you actually have not bought anything for real) are now worth $145,890 meaning that if you sell your euros you would have a $200 profit. What makes forex particularly exciting to me is that you can buy the 100,000 euros for practically a really small fraction of the price. Often times, the margin levels are extremely low; in some cases to actually buy the $145,690 worth of euros would only require a tiny amount such as 2,000 for intial margin. So in this case the $200 gain would be quite a gain; you would have a 20 percent gain on your investment, which is not bad at all.