Here we offer you tips you should know on how you can make your cool cash in Forex Trading.
“Forex” is a shorthand way of referring to the foreign currency exchange. It’s the market where currencies from different countries are traded. Investors trade in forex for the same reason that they trade in any other market: because they believe that the value of certain currencies will go up or down over time. Remember, currencies are commodities just like anything else. On some days, they’ll go up in value. On other days, they’ll go down in value. You can use forex to take advantage of the fluctuation in foreign currency prices to make money.
Learning Basic Forex Principles
Know how currencies are traded in the forex market. The forex market is a global exchange of currencies and currency-backed financial instruments (contracts to buy or sell currencies at a later date). Participants include everyone from the largest banks and financial institutions to individual investors. Currencies are traded directly for other currencies in the market. As a result, currencies are priced in terms of other currencies, like Euros per US Dollar or Japanese Yen per British Pound Sterling. By effectively seeking price differences and expected increases or decreases in value, participants can earn (sometimes large) returns on investment by trading currencies.
Understand currency price quotes.
In the forex market, prices are quoted in terms of other currencies. This is because there is no measure of value that is not another currency. However, the US Dollar is used as a base currency for determining the values of other currencies.
For example, the price of the Euro (EUR) is quoted as (price quote number) USD/EUR.
Currency quotes are listed to four decimal places.
Currency quotes are simple to understand once you know how. For example, the Yen to US would be quoted as 0.0087 JPY/USD. You should understand this as “you need to spend 0.0087 US Dollars to buy one Japanese Yen.”
Learn about arbitrage.
Arbitrage, put simply, is the exploitation of price differences between markets. Traders can purchase a financial instrument in one market with the hope of selling it for more in another.  Within the forex market, arbitrage is used to profit from differences in the quoted prices of currencies. However, these differences do not occur between two currencies alone, so the trader must use “triangular arbitrage,” which incorporates three different trades, to profit from differences in prices.
For example, imagine that you notice the following quoted prices: 20.00 USD/MXN, 0.2000 MXN/BRL, and 0.1500 BRL/USD (between the US Dollar, Mexican Peso, and Brazilian Real). You wonder if there is an arbitrage opportunity here so you start with a theoretical value of $10,000. With your $10,000, you could buy 200,00 Pesos (10,000*20.00 USD/MXN). Then, with your 200,000 pesos, you could buy 80,000 Reals (200,000*0.2000 MXN/BRL). Finally, with your 80,000 Reals, you could buy $12,000 Dollars (80,000*0.1500 BRL/USD). By making these trades, you’ve gained a $2,000 profit ($12,000 -$10,000).
In reality, arbitrage trades offer very little, if any, profit and price differences are corrected almost immediately. Lightning-fast trading systems and large investments are used to overcome these obstacles.
Trades in the forex are made in terms of lots. A standard lot is 100,000 units of a currency, a mini-lot in 10,000 units, and a micro-lot is 1,000 units.
Understand leveraged trades.
Traders, even very good ones, are often only left with a few points of arbitrage differences or trading gains. To counter these lows return percentages, the traders must make trades with large amounts of money. To increase the money available to them, traders often use leverage, which is essentially trading with borrowed money. Compared to other securities types, trades made in the forex markets can be made with incredibly large amounts of leverage, with typical trading systems allowing for 100:1 margin requirements.
The 100:1 requirement means that you only need to actually deposit 1/100th of what you are investing in the currency. The deposit is known as the margin and protects you against future currency-trading losses.
Trades using leverage magnify both potential gains and potential losses, so be careful when making these types of trades.
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