Hello and welcome this blog will introduce you to the basics of Forex trading.In order to start understanding how Forex trading works we will be explaining to you the most important terms that you will need to know and we’ll be using daily basic when trading Forex or Forex trading.But first let’s see what Forex stand for.
What is Forex?
Forex or foreign exchange trading is the activity where you can bet if one currency will get stronger or weaker relative another currency.For Example with 1 euro we can buy 1.39 USD (1€=1.39$). This exchange rate can change at any second.It is the banks which continuously adjusting to the rhythms of supply and demand that are responsible for this exchange fluctuation.
So lets make bet, let’s bet that the euro will become stronger than the US dollar in this case we buy a euro and US Dollar pair.Remember when we believe that one currency will rise against another we buy the strong currency and we sell the weak one.Since in most cases the sale of the currency will be handled by outside brokerage firm all we have to do is buy the US dollar ,Euro pair.
Another way to say this is that we will go long on the EURO/USD pair.So when we go long on the EURO/USD pair we bet that the euro will rise against the US dollars or if we go long on the USD/EURO pair then we believe that the USD will become stronger than the Euro.
If we believe that the euro will become weaker against the dollar we also sell the euro against dollar.Another way of saying this is that we short the EURO/USD pair, so when we short the Euro/USD pair we are betting that the Euro will become weaker than the USD.
What’s a PIP?
One Pip represents one one-hundredth of percent one pip=1% of 1% or 0.0001 which is the smallest amount of the currency fluctuation used by Forex and it the unit used to express the price of an exchange rate.
WHY DO THE EXCHANGE RATE MOVE SO FAST ?
As you probably know if your Euros parked in your local bank for one year your bank will credit your account with a certain percentage of interest.However what you may not know is that interest rate vary among different currency.
For instance the interest rate on your annual deposit in euros in a bank in Paris might be 3.5%, whereas your friends in Britain might be earning 5.5% on his deposit in pounds in london.
In order to take advantage of the higher interest rate of the British pounds you would probably sell your euros and British pounds.
However, you would probably not be the only one many individual investors and banks could do the same and if enough euros are traded for the pounds, the euro will become weaker and the pound stronger as decreased demand for the euros drives it price down.
Another reason why exchange rates move so fast may result from multi-billion dollars companies who need to convert the currency of large amount of money for example let’s say Honda the car manufacturer from japan sold sold 1 millions car (1000000) to the United States.
Honda has been paid from the US importers 20 billion u,s. dollars which gets deposited in a US dollar denominated account in japan, it’s April and it’s tax season the Japanese residents Honda has to pay one trillion Japanese yen in taxes this year that’s close to 10 billion u.s dollars.
This is a large amount even for Honda in order to pay the Japanese government Honda will have to convert the 10 billion U.S dollars to Japanese yen , So Honda goes into the Forex market and sell U.s dollars and buys Japanese yen.
The demand for U.S dollars at this moment will naturally go down since 10 billion U.s are being sold all at once similarly the demand for Japanese yep goes up because somebody wants to buy 1 trillion Japanese yen in this case the exchange rate between the Euro and the Japanese could easily be affected