Foreign Exchange Term
Forex stands for Foreign Exchange. It is a global platform where currency pairs are traded against one another. Forex daily trading volume is about $5 trillion, and it is considered the largest by volume and number of transactions.
As other asset traders, Forex traders need to predict the direction of the future price. As you can understand, the profits depend on the invested amount, and also on how much the prices rise or fall.
Currencies are always traded in pairs, there is a quote and a base currency. The base currency stays on the left and the quoted one stays on the right. When you trade a certain pair, you are speculating on price fluctuations of the quoted currency against the base currency.
For example, if you want to trade the EUR/USD pair, you will be trading on the price movements of EUR against the US dollar. There is a wide variety of forex pairs available to trade and prices are dependent on a large number of trading institutions. When you trade Forex, there is no need to buy the assets physically, you manipulate the price movements.
Currency price movements and volatility are impacted by many factors including political events like elections, speeches of world bank directors, referendums, economic data releases central bank decisions over interest rates, and are impacted sometimes even by natural disasters.
The Forex Market is dominated by the major pairs, which include the US dollar. By estimations the seven major pairs dominate around 80% of global currency trading volume.
The results of forex trading comes from the difference between the opening and closing price of the asset. In long trading, the profits come from the price rise, and in short trading the opposite happens, the profits are earned from the falling prices.
Let’s make some calculations:
Profit = ((Opening Price – Closing Price) / Current Price) * Capital Invested * Leverage – Commissions
For example, a trader opens a long trade for EUR/USD. The opening price is 1.18496. The closing price is 1.18328. $250 was invested. Leverage used 1:500. In these conditions the volume is $125,000, with a commission of $4.
Profit = ((1.18496 – 1.18328) / 1.18328) * 250 * 500 – 4
Profit = $173.47
If you choose to trade without leverage, skip the multiplying part with the leverage.
EUR/USD – It is referred to as the “Eurodollar”. This pair is the most traded pair globally, a good reason is also the fact of representing two of the biggest economies european and american one.
USD/JPY – It is also called the “Gopher”. The pair is also heavily traded and it presents the strength of the US dollar against the Japanese Yen.
GBP/USD – It is also called the “Cable”. The pair is still a strong asset in the market and it shows the strength of British pound against american dollar.
USD/CHF – It is also called the “Swissy”. It is also among the most traded currency pairs, and it keeps the status of a safe haven asset because of the high stability.
Forex trading hours, Forex trading time:
– New York opens at 8:00 am to 5:00 pm EST (EDT)
– Tokyo opens at 7:00 pm to 4:00 am EST (EDT)
– Sydney opens at 5:00 pm to 2:00 am EST (EDT)
– London opens at 3:00 am to 12:00 noon EST (EDT)
Most Active Hours = when two sessions overlap:
– New York and London: between 8:00 am — 12:00 noon EST (EDT)
– Sydney and Tokyo: between 7:00 pm — 2:00 am EST (EDT)
– London and Tokyo: between 3:00 am — 4:00am EST (EDT)
A leverage multiplies your invested capital, growing your trading exposure in the market. The leverage shows how many times the volume he invested will increase.
Let’s suppose you invest $250 applying a 1:100 leverage. The total trading volume will be $25,000 ($250 * 100 = $25,000).
Keep in mind that the leverage increases both, potential profits and risk level.
A high leverage is suitable for active traders who open and close their trades during the day, meanwhile, for long-term investors, using smaller leverage would be a smarter and safer choice.
The leverage values vary in different types of assets. The larger leverage scopes can be applied while trading currency pairs, and smaller ones while trading digital currencies.