The Foreign Exchange, often referred to as the Forex or FX, is the world’s largest financial market, with approximately 3 trillion dollars traded daily. The "goods" traded are currencies of various countries, with the majority of the action involving the so-called majors currencies: the United States dollar (USD), the European euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), the Swiss franc (CHF) and the Australian dollar (AUD). Gold and silver are also popular trading instruments. With the explosion of internet usage, the Forex market has become accessible to almost everyone.
Because of the Foreign Exchange’s relatively volatile nature, and the corresponding potential for very high profit, investing in the Forex market might be considered a form of speculation. The highly leveraged financing commonly offered by Forex operators allows traders extremely high potential profits with a comparably small amount of capital investment.
In Forex, clients are offered leverage as high as 1:200, so the client must invest, in this case, only 1/2 percent of the position they would like to buy. In practice, the trader uses a credit, and covers only the risk of the operation (the percentage of presumed currency volatility).
For example, suppose a trader utilizes a 100:1 leverage, and buys a contract valued at $100,000 with an investment of $1,000. With a 1% increase in the position, the trader would make a profit of $1000, or a 100% return on investment.
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Obviously, brokerages make a commission for every trade executed, which is generally factored into the prices quoted in the form of a "pip spread". This cost is very small, usually 0.0003 of a unit or, in Forex lingo, three pips. Three pips is equivalent to three-hundredths of one penny. Of course, when trading extremely large amounts of currencies, this can add up.
For example, if a currency pair is quoted as EUR/USD 1.4000/1.4003, the price at which a broker will sell (Ask) one EUR is 1.4003 USD, while the price at which a broker will buy (Bid) one EUR is 1.4000 USD. The price difference is the broker’s profit. With such a pip spread, the cost of buying one lot (USD 100,000) would be USD 30.
Of course, a lower spread is better for the client. If the position above increases by 10 pips, to 1.4010/1.4013, a trader would earn seven pips, having bought the position at 1.4003 (broker’s selling price), and selling at 1.4010 (broker’s buying price).
Internet Forex Platforms
Today, anyone with an Internet connection can exploit the Forex market utilizing Forex trading platforms, computer applications that enable you — in few simple steps — to buy and sell currencies. These online brokerages provide trader’s the real time information needed to make informed decisions, and the technology to instantly execute trades.
This site offers useful information about the Forex market, helping you gain the practice, information and knowledge necessary to become a successful trader.
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