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STEP 1:
The step 1 defines certain concepts and terms of Forex Trading-
Quotes are a vital part of the foreign exchange trading, as Forex trading is
done in terms of quotes. Therefore, comprehending these quotes is the first
important step.
Firstly, in a Forex quote, the currency listed first is known as the Base
currency. For example, we have EUR/USD. Here, EUR is the Base currency.
Secondly, the base currency has always the value 1. In other words, the rate
of other currency is calculated against 1 pt of the Base currency. For
example, we have EUR/USD where EUR is the Base currency. Then 1 EUR = 1.2323
USD or the value of one currency against the other in the pair.
Thirdly, when dealing in terms of quotes, prices are expressed in terms of
Pips. Pips can be defined as “percentage in points” and are mostly the
fourth decimal point i.e. 1/100th of 1%.
Also used while trading through quotes, are two significant terms known as
Bid and Ask. These two terms are responsible for making trading quote, a
two-sided quote.
Bid can be defined as ''The price at which the base currency is sold
concurrently buying the counter currency. Ask can be defined as “The price
at which the base currency can be bought concurrently selling the counter
currency''
STEP 2:
Step 2 illustrates the other key features of Forex trading which are namely,
the leverage and the Margin. These two are immensely important in attracting
the interest of the traders as they enhance the trading power of the
investors.
The leverage is the ratio of the deposited amount to the amount that can be
traded. Leverage enables the investors to deposit a small amount of money
but still trade for a much larger amount. This way, investors can trade
easily, utilizing less money to deal.
Margin, therefore, is the minimum amount required to be deposited before an
investor starts trading. This can also be known as the initial amount with
which the Forex trading account can be opened.
A detailed Example below illustrates exactly how Forex trading is done-
Supposing the current bid/ask price for EUR/USD is going by the rate of
1.5027/30, giving you the option to buy 1 euro with 1.5030 US dollars or
sell 1 Euro for 1.5027 US dollars. Now, if you feel that the Euro is
underrated against the US dollar, you would opt on buying Euros, selling
your dollars at the same time. So you buy 100,000 euros by paying 150,300
dollars. You can then start analyzing the market, waiting for the exchange
rates to rise.
As predicted, the rates begin to rise and then you decide a favorable rate
at which you plan to sell your Euros to get a hefty profit. Supposing the
Euro rises to 1.5090/93. Now, to realize your profits, you sell 100,000
euros at the current rate of 1.5090, and receive $150,900.
You bought 100k Euros at 1.5030, paying $150,300. You sold 100k Euros at
1.5090, receiving $150900. That's a difference of $600 or in other words,
you successfully earned a profit of $600.
Return on Investment = $600
Always learn a lesson from the Forex Indicators, keep a watch, think long
term and then take a step.
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