Investment Basics: Forex 💱💶💷

The currency market or Forex is the largest financial market in the world and plays a vital role in the global economy. Everyday trillions of dollars are commodified from one currency to another. This type of currency exchange is essential for international transactions.

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Forex participants include governments, companies and, of course, investors. Governments use the foreign exchange market to implement policies. For example, when doing business with another country, be it asking for money, lending money, or offering help, a country needs to convert its currency to a foreign currency.

Companies use Forex to facilitate international trade. For example, they may need to convert payments for goods and services purchased abroad or exchange payments from international customers in their preferred currency.

And investors use Forex to speculate on changes in currency prices. Currency prices change almost constantly during the week because the Forex is open continuously from Sunday at 4:00 P.M. until Friday at 4:00 P.M. central time. A trading day begins at 4:00 P.M. and ends at 4:00 P.M. central time the next day. The market has to be open 24 hours due to the global nature of the economy.

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Let's look at some basics of how currency trading works.

When you exchange currencies, you are not only exchanging a product, but you are exchanging one currency for another. This is called a pair of divisions. The price of a Forex currency pair defines the value of one currency in relation to the other. The easiest way to understand a quote is to read the pair from left to right.

Example, EUR / USD currencies. If the EUR / USD is trading at 1.20, this means that one euro is equal to 1.20 USD. Another example using the USD / CAD currency pair. If the USD / CAD is trading at 1.25, that means that one USD is equal to 1.25 CAD. Although there are 2 currencies involved, the pair itself acts as a single entity Like when stocks are traded, investors favor themselves when they buy the currencies and their price rises

Investors can also make a profit if they sell a currency pair and the price drops. example. Suppose an investor believes that the European economy will grow faster than the American one. And as a result, she believes that the euro will strengthen against the US dollar. They can acquire the EUR / USD currencies to think about their hypothesis. If the price of the currency pair increases, she will make money. On the contrary, if the price falls, she will experience a loss.

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Key aspects of Forex.

We will start with margin

When trading on margin, you only need to place a percentage of the total investment to enter a position. The amount is known as the margin requirement. When trading other securities such as stocks, trading on margin implies that you are borrowing funds from your broker. However, Forex trading can only be hedged using funds in the investor's currency account. Investors cannot borrow funds to conduct a forex trade.

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If they do not have funds in their Forex account, they must transfer funds before placing a trade. Forex margin requirements vary based on currency pairs and trade size. Currency pairs are usually traded in specific amounts known as parts. The parts represent 100,000 units and the mini parts represent 10,000 Depending on your brokerage firm, you may also be able to trade currencies in 1,000-unit increments, also known as micro lots.

Margins can be as low as 2% of a trade or as high as 20%. But the margin requirement for most currency pairs ranges from 3% to 5%. To understand how margin is calculated

Example

using the EUR / USD pair. Suppose this pair is trading at 1.20 and an investor buys a lot of 100,000 units. The total cost of the operation would be USD 120,000. That is a lot of capital. However, the investor does not have to pay that full amount. Instead, he pays the margin requirement. Let's say the required margin was 3%. 3% of $ 120,000 is $ 3,600. That is the amount that the investor needs in his Forex account to place this trade. This brings us to another.

Leverage

Leverage allows investors to control a large investment with a relatively small amount of money. In this example, the investor can control $ 120,000 with $ 3,600. The leverage associated with currency pairs is one of the biggest benefits of the Forex market, but it is also one of the biggest risks. Leverage gives investors the potential to generate large profits or losses.

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A more important element in Forex is: financing This is the calculation of the net interest owed or earned on currency pairs. And it happens when an investor holds a position after the close of the trading day. The US dollar is associated with an overnight loan rate, established by the Fed. And it defines the cost of asking for money supplied. Similarly, each foreign currency has its own overnight interest rate. When you trade a currency pair you are exchanging 2 currencies with each other. Even though the currency pair acts as a single entity, it technically has an excess of one currency and a lack of the other. In terms of financing, you are lending to the currency you have in excess and you are borrowing the currency you lack.

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This lending and borrowing occurs at the overnight interest rate of each respective currency. In general, an investor receives a credit if the excess currency earns a higher interest rate than the missing currency. On the contrary, the investor is weakened if the excess currency has a lower interest rate than the missing currency.

Example

Suppose an investor has a position in the AUD / USD currency pair. Let's say the overnight loan rate for AUD is 2% and the same rate for USD is 1%. The investor is long in the currency pair, which means that he has excess AUD and is short of USD. Since AUD has a higher interest rate than USD, the investor will receive a credit. However, if the investor were to short the AUD / USD currency pair, he would have to pay the debit because he is missing the currency that has a higher interest rate.

Financing is done automatically by your brokerage company. However, it is important to understand how it works and its financial impact on the operation.

We have reviewed only a few elements of the Forex market. As with all investment opportunities, the Forex market has a unique set of risks and benefits. And education is the first step in determining if this is the right opportunity for you.