Saturday, October 3, 2009

HOW FOREX WORK

How it works
Foreign exchange is an exciting market. Individual traders trade on margin. For example, a stake of just $100 gives a trader access to a deal worth $10,000 (using a leverage of 1: 100). Markets fluctuate constantly and for a margin trader every little move is magnified 100 times. And while potential profit is unlimited, the trader can only lose their initial investment – for this example, $100.

For example:

Leverage (gearing) enables you to hold a position worth up to 100 times more than your margin deposit. For example, a USD 1,000 deposit can command positions of up to USD 100,000 through leverage. If you believe that the euro will strengthen against the dollar you'll want to buy euro now and sell it back later at a higher price.
  • You want to buy the euro - We quote EUR/USD at 1.2501 (bid) 1.2505 (ask), which means that you can buy 1 euro for 1.2505 USD. In this example you buy EUR 100,000, at the quote price of 1.2505 USD per euro.
  • The market moves in your favor - EUR/USD is now quoted at Bid 1.2515 Ask 1.2519
  • Now you sell your euro and get the profit - You sell euro at a price of 1.2515
  • The profit is calculated as follows - Sell price-buy price x size of trade
    (1.2515 minus 1.2505) multiplied by EUR 100,000 = USD 100 Profit
The Attraction of Forex Currency Trading
Foreign exchange currency trading is a regulated market. It operates under the strict rules of the world's financial authorities and the biggest financial institutions on the planet.

The main incentive of currency dealing to private investors and the attractions of short-term Forex trading are: 24-hour trading, 5 days a week, with nonstop access to global Forex dealers.

Further incentives to Forex trading:
  • An enormous liquid market making it easy to trade most currencies
  • Volatile markets offering profit opportunities
  • Standard Forex instruments for controlling risk exposure
  • The ability to profit in rising or falling markets
  • Leveraged trading with low margin requirements
  • Ability to trade not only Major currencies but also exotics, gold and silver etc.