Forex and CFDs trading has quickly become one of the most popular ways of trading in global markets, especially when the trading opportunities emerged online. Online trading platforms are becoming easier to use every day and platform providers binary option expert advisor their best to provide a better overview of the entire trading process.
Also, forex and CFDs brokers are regulated entities, which significantly improves trader’s status. Foreign exchange is an exchange among different currencies on global markets. Forex is not a new thing, it has been around ever since the first coins were introduced in 600 BC. However, online forex trading is the relatively new type of trading that managed to establish a solid reputation over the years. Start as Apprentice, become a trading Master. Nowadays, forex is the biggest financial market in the world.
5 trillion USD, more than any other asset. The reason why forex is dominating the financial industry is quite simple: money is something everyone uses and everyone needs. For example, let’s say you are a sports shop owner in the United States. You want to sell goods that are produced in Germany, which means you have to import them. Forex trading became popular when it became accessible to a greater number of people. Most people who are interested in any form of online trading, sooner or later encounter forex contracts that are based on currency pairs and the ratio between them. There are many combinations of currency pairs, but keep in mind that not all of them are equally popular or present on the market.
One of the main benefits of forex trading is that it can be done from the comfort of your own home. All you need is a computer, tablet or a smartphone and a good internet connection and you can start trading. Also, most forex trading platforms are also web-based or have special mobile trading apps which means you can trade whenever and wherever. Some of those educational materials oversimplify the entire trading process, while others go in depth and can easily confuse beginners who have no trading background and lack basic understanding of technical and fundamental analysis. The best and easiest way to explain basic principles of forex trading is by an example.
Let’s say the trader is interested in a currency pair that is among the most popular on the market EURUSD. The exchange rate for this popular pair is 1. 1515 which means someone doing a currency exchange has to give 1. EUR, as they believe the value of this currency will grow.
It is important to understand how currency market is never static, it has fluctuations and is moving all the time. Sometimes it gets very volatile as well, but no matter how significant the movement is, it is always influenced by several factors and variables, that are out of the trader’s reach of influence. Let’s get back to our trader from the beginning of the story. For the purpose of this story, we will say that the trader believes that the Euro will grow, and buys 100 EUR for 115. Europe gets affected by some significant changes and good news from monetary banks, so EUR gains in value.
The change seems almost insignificant to an average person that is not on foreign exchanges. Still, the trader who bought the 100 euros managed to make 0. In our example, the movement was 0. 0025, and the trader from the story earned 25 pips. What are pips in forex trading? Remember these 0,25 that were earned as trading income in our example.
Traders usually don’t speak in these absolute numbers since exchange rates movements are not that big on a daily or monthly basis most of the time. 10000 of the exchange rate, they call a pip. Meaning that what was earned in the previous example was 25 pips. This is the way the market expresses movements no matter whether the value is falling or rising. What is Leverage in Forex Trading? We will continue with our example. Some might say that it doesn’t even make any sense.
Still, the trader can use the leverage. Leverage is allowing traders to make more money in their trades and literally serves as a lever that allows them to multiply their profits as they have more money at their disposal. So, if the broker offers 1:100 leverage, the trader from our story won’t be trading just 100 EUR, but 10,000, as the broker offered a leverage. Traders must put some effort to understand that leverage is not a free money or a free loan.