Don’t worry about calculations, in practice you don’t have to compute anything as computers do this for you.
Basics
Currency Pairs
When playing on Forex you trade on currency pairs, for example EUR\USD which at the moment is priced at 1.4283.
It means that one unit of base currency (Euro) is sold for 1.42833 units of quote currency (USD)
Orders
You can start two types of orders: Long order and Short order, Long means buying currency pair, Short means selling currency pair.
Please note you can sell currency pair even if you don’t have it, it means you can profit from both ups and downs so there is no such thing as crisis or depression on Forex, you can always make money :).
So if you predict that Euro will rise against Dollar you go long and if you think it will fall you go short.
Bid\Ask and spread
If you go to currency exchange you will notice that there are two prices for reach currency – buy and sell, difference between these two is spread – profit of the currency exchange.
Same thing is in Forex, but they are called Bid and Ask. You open long order on ask price and close on bid price, short order starts at bid price and close on ask price. Spread is difference between these two prices.
Pip
Pip is a smallest digit of currency pair, for example for EUR\USD its 4th place after zero. Profit or loss is usually presented in pips, for example if price will raise from 1.4283 to 1.4300 you will earn 17 pips.
Leverage
Size of your trade is multiplied by leverage which is different for every broker.
Some have 1:20 while others have 1:400. For example if you have 1:100 it means that you can make trades 100 times bigger than your deposit so with $100 you can make trade of $10000.
Simple Example
Let’s say you have $1000 at your disposal, predict that price of euro will go up and decide to profit on this.
From our broker we get following information: Leverage is 1:100 Bid price is 1.4267 and Ask Price is 1.4268.
We open buy order (go long) on Ask price so we buy (100* 1000) /1.4268 = 70086.91 euros.
Let’s assume we were right and euro rise by 100 pips to 1.4367/1.4368 and we decide to close this order.
It’s close on new Bid price which is 1.4367 so our 70086.91 euros is now worth about $100694.
We’ve just earned $694 dollars for one trade that’s about 70% profit for a single trade which could have been active only for few minutes...
On the other hand if we were unlucky it would be 70% loss for a single trade…
These high figures are result of the leverage and that's why some people consider Forex to be very risky.
If you have bad money management and lose some trades (which will happen sooner or later) you can reduce your deposit to zero in few hours.
Normally traders don’t use their entire deposits for single trades, instead use about 1%-3% per trade which is still very profitable and much safer.
Summary
I hope I’ve managed to explained basics of Forex in these two posts, in next one I’ll give you information how to start, where to look for information, strategies etc.
If you don’t understand something, have any questions related to Forex please write them in comments.
Very interesting. You have reached my full attention. I would definitely take some action regarding that topic. Beside I've got couple of questions here:
ReplyDelete1) As I understand to start playing you have to open your private own account where money could be stored. What about monthly fees and taxes? Are there any?
2) What is the minimal obliged quota that allows you to play / trade? Are there any limitations or restrictions?
1)
ReplyDeleteGood brokers don't collect any monthly fees, they earn on spread. You even get the interests for deposited money.
It's taxed under capital gains tax (Podatek Belki in Poland). If you trade on Polish broker they send you appropriate PIT once a year, otherwise you must manualy report your income in your tax declaration.
Furthermore if you have considerable profits you can go offshore and pay fixed tax ammount but that's another story.
2) It depends on broker, in fact some brokers don't require any minimal deposit, you can play even with $1, but you should carefully study the broker and platform rules because playing with very low ammounts might be unprofitable.
Very interesting and helpful presentation. The best part is when it is said that with a single trade you can make almost 700USD. In the next sentence however it is also said that you can also lose 700USD. And that is true about the forex and stock exchange as well. You gain as quickly as you can lose money. Unless you have been into this for years it is hard to predict what will happen next. You might be lucky couple times but at the same time you might lose. And the more you lose the more you will want to get back and the more you will play. It is like poker at some point. If you do not know when to stop you can lose everything you have.
ReplyDeleteHubert - that's why you should never ever play for real money without tested strategy, but if you manage to develop one (which is not that hard) you can have good profits. Friend of mine manage to get about 6-7% per month consistently for two years and he is playing with minimal risk so it depends on you:).
ReplyDeleteIt's good explanation of Forex. As I understand Forex is more difficult and risky than stock. In stock you don't have to know mcuh.. You buy and sell shares and if you have luck you earn money. Of course there are professional traders who knows a lot about stock and companies so the have a big chance not to loose their money. In Forex you have to know how it works and you have more chance to loose money.
ReplyDeleteAnyway I'll try Forex after reading next part of your presentation.
Marcin - I haven't played stocks but it's quite possible that Forex is more difficult, you are probably right here, but whether it’s more risky it depends on you.
ReplyDeleteIf you count on luck then it’s more risky then going to Las Vegas but if good strategy and money management system risk have is in fact minimal. Furthermore technical analysis seems to work better on Forex.
>>As I understand Forex is more difficult and risky than stock. In stock you don't have to know mcuh..<<
ReplyDeleteFor me it sounds like stock is more difficult because you have to follow every company etc. And with Forex you only have to follow global news. There are more companies on the World then countries (that's my logic).
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After reading second part it still sounds like gambling and a lot of work and full of stress life. :)
Sebastian - whether it's gambling it depends on your playstyle, it's not that hard to have strategy with for example 70% profit/loss ratio, combine this with good money management and you can have stable profit.
ReplyDeleteI don't understand some things. How can you manage big amounts when you only invest a small one? It doesn't make sense to me. This money (the big one) belongs to someone, right? And only he can manage it...
ReplyDeleteanother question: how can you earn on a currency drop?
Besides, I enjoy it, thank you.
You automaticaly borrow money from broker when you make trade and give it back when you close trade. How much you can borrow depends on leverage. (Broker profits from spread as it's calculated from the total value of trade)
ReplyDeleteYou can earn on drop because in fact you trade currency pairs not currencies, in pair if one currency goes down other must go up. So selling currency pair can be simplified as buying the opposite currency in pair.
what if you lose 10000 Euro you had borrowed? do you have to give it back to the broker?
ReplyDeleteIt works a bit different, for example you have broker with leverage 1:10 and open trade for 10000 so there is 1000 of your money and 9000 of broker money. If loss from this trade will reach 1000 broker will automaticaly close this trade in order to avoid losing his money.
ReplyDelete