Ever wondered what forex means? When you look at your cool uncle in finance talk about trade and exchange, do you feel the urge to get involved? Well, don’t worry. We have got you covered. Here we will give you a detailed explanation of forex meaning and why forex is important.
This is your beginner’s guide to the global economy! So, whether you want to sound savvy the next time you are discussing finance, or you want to play your hand in the big leagues, this article is the one for you.
Forex meaning is literally in the term. It’s a compound word for foreign and exchange. It is also known as the currency market and FX. This trade is the largest in the world as it involves multiple countries and foreign currencies.
Forex is an economy of $4 trillion a day. The immense traffic in this sphere ensures great liquidity, which in turn gives you reliable pricing. And here’s why forex is great. When you begin, your trade costs are exceptionally low. If you’ve got an eye for it, you can easily make it big.
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The Basics Of Forex
The rule is quite simple. If you want to make a profit, you need to buy currencies and sell them for more than you spent. The other side of the coin is, of course, you can try to sell at a higher price and buy cheap. The thumb rule is, the more commonly a currency is traded, the more liquid it is.
There can be some fluctuations as a currency’s price is always dependent on another currency’s cost and tradability. For example, a British pound is equivalent to 2 US dollars.
In terms of the forex trading rules, the British pound will be priced at 2.0000 for a fair pair of GBP/USD. Foreign currencies are always paired together to represent their actual rate of exchange. In simple terms, currency 1 is represented in the value of currency 2.
There are several traditional currency forex pairings. Some of them include USD/JPY, EUR/GBP, and EUR/USD. These are also called major pairs because of their liquidity. However, there are also minor pairs, which are sometimes called ‘exotics.’ Some of them include PLN- the Polish Zloty, MXN- the Mexican Peso, and NOK- the Norwegian Krone. But be careful with these less traded currencies because they are not so liquid.
Forex Trading Spread
Like all the trading prices, the forex trading spread also consists of two categories. Your selling price, which is represented by the lower half of the trading spread, and the buying price, which is represented by the upper half. However, you need to make sure which way of the spread you want to go for each pair.
When you are ready to start trading, remember that the spread will reflect currency 1’s price in relation to its second forex pairing. So, if you get an offer of 1.30000 EUR/USD, that means you will have to pay $1.30 for one pound. This is the time you need to start analyzing if the euro’s value is going to rise up against the dollar anytime soon. If so, at the right time, you can buy your dollar for more than you let it go.
How Should You Calculate Your Profit?
Foreign exchange or forex is all about understanding the global economy. You need to keep track of what policies and trade deals are taking across the globe to predict which currency will see a rise or a fall accurately.
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Here’s another instance. For example, say that the EUR/GBP forex spread shows 0.8414-0.8415. And if your assessment tells you that the euro’s value is going to rise soon against the pound, then buying the offered price of 0.8415 euros would be a profit to you.
Suppose you bought the €10,000 for £8415. The EUR/GBP spread goes up to 0.8532-0.8533. Now, you can transfer the value of the euros you bought to pounds by selling it for 0.8532. So, you buy £8532 for €10,000. And, you have earned a profit of £117.
Keep in mind that profits are always represented in the second forex currency pairing.
On the other hand, if you assess that the euro’s value will fall, then you can sell €10,000 for £8414, which is the first bid price if you remember.
Then, as the EUS/GBP spread falls back to 0.8312-0.8313, you can buy your €10,000 for £8313 or 0.8313. And so, your profit will be £111.
Why Forex Trade Is Essential
Forex plays a huge role in the world economy and the other way around. Many decisions from macroeconomics quickly shift the structure of Forex. It also provides a great opportunity for traders to get involved in the global economy.
Forex takes place across the global market, especially the top world economies. New York to Tokyo to London.
There are two different ways for you to start on forex via the intertrader. One is CFD and the other is spread betting.
Under CDFs, you can sell or buy a contract that represents a sizable trade. For instance, you buy a contract of trade representing £10,000 with regards to GBP/USD. So now, your loss or profit can be calculated through the second forex currency pair. Here, it will be represented by the USD.
In spread betting, you can bet some of your currency per pip movement with regards to forex pair pricing.
The best thing is, in either of the ways, you don’t need the complete currency value to open your position. You can deposit a margin of the betting value, which is meager, to say the least. When you are in a speculative position, you don’t have to exchange any real currency for your forex currency pairs. It’s only when you close that your losses or profits are realized.