The blog is about one of the biggest financial
markets in the world – Foreign Exchange Market. As you probably remember, or
maybe know that before 1973 this market did not exist. Changing currencies was
not easy at the time and getting good conversion rates too. Most currencies
were pegged to gold, some to silver, yet others to a basket of other
currencies. Creation of Forex liberated the world from these practices and
enabled countries, banks, funds and now individual traders to trade in this
market for both economic and speculative purposes. Breton Woods opened the door
to one extra market that quickly outgrew all stock markets combined together
and even Futures market.
In the spot market you trade one currency against another.
For example, if you buy usd/jpy currency pair you automatically buy US dollar
and at the same time you sell Japanese Yen. If you sell usd/jpy, you
automatically sell US dollar and buy Japanese Yen. There are up to ten currency
pairs that traders call: major pairs and over a hundred, which traders call
crosses. These are less popular pairs that have smaller volume, are less
liquid, but also present good reward opportunities.
There are lots of participants in the market; some
have already been mentioned above, some I will probably mention in my future
posts.
Brokers who make money by giving opportunity for
buyers and sellers to trade make their compensation by means of what we call:
spreads. What is spread? It is a difference between sell price and buy price or
as we know it between bid price and ask price. In majors, the spread might be
as low as one pip during hours with lower volatility and grow to ten pip or
more when some Forex news is released. Brokers do not want to lose money and
hedge themselves by expanding spreads for a few minutes.
The daily volume in Forex is huge. It can reach
around 4 trillion dollars per twenty four hours. No wonder so many speculators
are interested in it.
You can participate in the market with as low as one
hundred dollars. How is that possible? It is possible because of leverage. What
does that mean? It means you will have to give one hundred of your dollars and
a bank or a broker will give you one hundred times more. This is called
leverage. In such a way just by pledging your one hundred dollars you will be
able to operate with ten thousand dollars, or one mini lot. A standard lot is
one hundred thousand dollars.
The best part of Forex market is the liquidity. You
can open a position with one hundred million dollars and close it in a few
minutes.
There are disadvantages too. But I will discuss them
in my future posts. Good bye for now.
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ReplyDeleteSaar Pilosof