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So you are a new person in the world of Forex. Perhaps you knew that thing from your friend, or maybe from books you bought at the bookstore, perhaps through ads on the internet. Forex trading is started to be popular since the era of online trading.
After reading or find out a little about forex, you may know how much potential profit in the forex market trading. Maybe it’s big enough in your mind. Large enough to satisfy all your dream and it's also worth to be learned.
Well, nothing wrong with all that on your mind. So do with your beautiful dreams. All of you have rights to have a dream to live a well-established and financially independent.
But that is just little part of sweet things in the world of forex. Most ideal world we can live on. And perhaps if asked more about the forex trading, you may encounter these following questions.
"What's the difference of forex with money changer?"
"Is it like a stock trading?"
"Where I can get the profits from?"
"Is that legal?"
"How about Loss"
Wait ... I know you have many questions. All questions will be answered in the this blog.
Well, let's just start with our first introduction and forex trading.
To ease your introduction to forex, I will assume that forex trading is analogical with the stock or money changer. This is because most of us know what money changer or trading stock is.
If you asked what the forex trading is, then the answer can be varied. At most, I like this simple definition: forex trading is a form of investment instrument for foreign currency traded in pairs. Forex itself has some other name such as Fx, or margin trading. That's all more or less to the forex trading.
Profits of investing in the forex (forex is an abbreviation of Foreign Exchange) is obtained from the difference between buying price and selling price of the currency we traded.
So, forex exactly the same as when we exchange money at the money changer, is it? Yes, it is. From the beginning I assume that forex trading is analogical with the money changer. Well, similar is not the same. There are differences among them. The difference is there exists a margin trading and there is no physical delivery of goods.
Forex trading are done in pair of currency which is called the pairs. For example USD / JPY pair which means that the exchange rate between U.S. Dollar and Japanese Yen. By the way, before I forget, there will be some of the terms or abbreviations that we will meet in the forex world. we need to know about it, but do not worry, I have already set up in the dictionary term other page, or you can always open wikipedia for more info.
Among the instruments on investment market, forex trading has the biggest amount of capital. Traded in large volume around USD 2 trillion (remember, in the U.S. Dollar) That's about 46 times greater than the capital traded in commodity stock market (eg rubber, coffee, gold, etc.). With its capitalization, the forex trading market, known as the most liquid and largest in the world.
Only 5% of the funds traded in forex market is the government’s funds. 95% others are owned by investors from all over the world. It’s the biggest market and indeed very complex. Another benefit of forex trading investment instruments is that they’re active 24 hours a day and 5 days a week. They’re all coming from the forex market in Europe,
Not all currencies can be traded here. Only a few developed countries’ currency can be used such as: USD (U.S. Dollar), JPY (Japanese Yen), GBP (British Pounds Sterling) EUR (Euro) CHF (Swiss Franc), and AUD (Australian Dollar). So when we invest in the forex trading market, then we will not find the form of pairs IDR (Indonesian Rupiah) with the USD. The allowed one is the pair of currency pairs I mentioned before, such as: EUR / USD, USD / JPY, CHF / USD and so on. If you remember our initial definition, forex trading is foreign currency trading with other currencies.
This is one difference with the money changer in general. If you go to the money changer and switch your Indonesian Rupiah with U.S. Dollar, then that means you do a transaction with a pair IDR / USD a.k.a. Indonesian Rupiah with U.S. Dollar.
This never happens in forex trading. In tradition, the currency traded is only the currency of the country that has been developed fundamentally with huge and stable volume of exports and imports.
The next one in the forex trading is that it will never be traded physically. It’s different if you go to the money changer and exchange your Dollar, then you required to bring amount of money to be exchanged in your pocket physically.
Well, in the forex, trading (buy/sell) is not done physically. All the evidence of transactions are recorded electronically. In the old time, all forex transactions are recorded in the form of physically written securities. Then, after the widespread use of the phone, only proof of the transaction is getting smaller, it’s called the quotes. From here on, the term Dealing Quotes (DQ) was born.
Well, now trading forex is no longer done through the phone. Now is an era of online transaction. All transactions and evidence of the transaction was done and recorded online. You simply fill the user id and password given by the platform provider (in this case called a broker) and after a click away, all the detail of your transaction will be displayed.
This is all becoma the easier in the forex deal, because anyone can do more and more transactions. The transaction is no longer limited by place and time. Because of handled by the system and not through the phone anymore, which must be held by men (dealer), then the forex investor can invest at any time he want for 24 hours a day with a variety of convenience.
Ok, this last material of our lesson. One of the most prominent in the world of forex trading is that its trading model made by the margin trading system. Margin trading is trading with a system using only collateral in trading (margin = collateral).
This is different from the trading system with the spot method we usually did from day-to-day. Spot means that currency is being traded one on one basis.
Let me give a simple illustration, but real. I take the example pair (pair) GBPUSD currency. This means the currency of British Pounds Sterling exchanged with the U.S. Dollar.
At the time this article was made, the exchange rate for GBPUSD is 1.9650. This means that 1 British Pounds equal with the amount of U.S.$ 1.9650. Usually movement of currency is around 100 points per day. So, tomorrow, say the exchange rate will be 1.9750 GBPUSD. Did you know how’s the profit when you trading with or without the margin trading?
Now let us study one by one. The first one is without using margin trading or called trading Spot.
Because we know the price will be increased, to make profits your action is to make a buy. Buy low and sell high.
Example Trading Spot
You buy a fund as much as 100 pounds to gain. So the profit is (1.9750 - 1.9650) x 100 pounds = 0.01 x 100 = 1 Pounds Sterling. Yes it’s indeed small profit, because currency movement is not very great day-by-day. What if we deal with 10,000 Pound of capital. That’s means we can make profits about 100 Pounds Sterling with the same movement just like the previous examples.
Well, you required to deal with huge capital if you’d like to earn acceptable profits. Yes, that is the model of trade with the Spot. This means that to obtain large profits, you are required to pay as large number of capital as well. Not effective if seen from the side of capital and profit earned. That's why you rarely find people who invest with a foreign exchange spot trading, except that the funds involved are very large.
Sample Calculation of Margin Trading.
Margin trading solves this problem with the collateral model. Same cases have the more or less same way out. 10,000 pounds is required if you want sufficient amount.
But, with the margin trading, you do not need to spend those 10,000 Pounds to buy 10,000 pounds. That’s it, you just simply deposit on the collateral only. How much is it costs? In old times it’s required to deposit 10% of the capital. That is if you want to buy as many as 10,000 Pound, you can simply spend only 1000 Pounds. Yes at least it’s much reduced compared to the original. But it remains large.
Now, this amount of collateral deposit decreased to 5%. And after receiving many request down there, now most companies’ collateral deposit for forex trading is small enough to be able to buy or sell action. Only 1% or 1:100 (this is called leverage ratio).
That means if you want to buy as many as 10,000 Pounds, you can simply spend as much as 100 Pound. Indeed lot more cheaper is it?
The profits gained are also fixed: 100 Pounds. Wow, with Rp 100 Pounds of capital we can benefit 100 Pounds a day. That means our profit reached 100% within 1 day. Extraordinary indeed.
Well that is the benefit of margin trading. Something impossible done by conventional trading. But wait ... Is it that broker does not suffer incredible loss if they lend us 10,000 Pound while we only spent 100 Pounds? Not at all. Remember our discussion before, forex trading is not done physically. That means broker does not need to give as much as 10,000 Pound to buyers because all the transactions are not carried out physically. So, margin trading solved unbalance the profit loss percentage.
Ok. Margin trading become really helpful in this session. Later we will learn together that margin trading was actually a double-edged sword with the same sharpness. Logically, as margin trading can increase your profits, it can also increase your losses. We’ll see about that later.
