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The concept of Forex Trading
Forex Trading is a worldwide currency exchange relationship through the electronic network. Forex itself is an acronym that refers to the Foreign exchange currency market, where the implementation is done by the brokerage companies and banks that do currency exchange.
Forex trading market is the largest and most liquid market of all financial markets there. With a trading volume per day reached U.S. $ 5.2 trillion, forex trading transactions is much larger than the entire volume of accumulated equity and futures that exist in the United States (see Figure 1).
Forex trading previously held exclusively by governments and banks. However, because of the rapid growth of information and the ease of the internet, Forex trading has been widespread and can be implemented by anyone.
The rapid development and ever-expanding volume level makes it difficult for the forex trading market to be manipulated, even though the central bank does not have the ability to drive or maintain the value of their currencies in a long time.
Understanding Forex Trading
Foreign Exchange, commonly referred to as FX. In Indonesia, the term is better known by an abbreviation of Foreign Exchange, which means that foreign exchange rates or currencies other than dollars.
Transactions in Forex trading, or trading means exchanging one currency with another currency. Unlike instruments in general, the currencies traded in forex trading involving certain pairs (pairs), for example Euro / U.S. dollar (EUR / USD) or U.S. Dollar / Japanese Yen (USD / JPY). Someone who bought Euros, automatically also been selling U.S. dollar simultaneously.
Forex trading example:
Different currencies in almost every country, resulted in the exchange rate for each value of the currency in question in a different country.
Imagine this, as an Indonesian citizen, you want to have a visit to the United States. To travel and meet the cost of living there, you must exchange Rupiah to U.S. dollars. For example, at the time you purchase $ 5,000 in the price Rp.11.000, -, and to fund the dollar you have to spend Rp. 55.000.000, -.
By buying the USD at a lower price (11,000) and sell it at the price of 12,000, then get the benefit as the example above, you have done a forex trading transaction.
In a regular forex trading, there is a little difference with the example above. Trading forex traders have had a different purpose. Most of them are not buying the currency exchange purposes only, but to benefit from it.
The market also has a difference between buying and selling price (bid / ask) that is pretty tight or small, not as a money changer, which generally have a large margin.
Currency contracts are also traded in the forex trading unit size (commonly called lots), valued at $ 100,000. While at the money changer you can exchange currency with whatever amount you want.
You take a position in a forex trading transaction when the value of a currency expecting an increase or decrease compared to the other currencies. If the currency value you bought has increased, you may wish to liquidate your position by selling it in the market. So at the same time, you also buy other currencies.
The most common currencies traded in the forex trading market is the U.S. Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar (see figure 2). FX market runs 24-hours a day, 5 days a week and uninterrupted access to global dealers. Forex trading market is not concentrated in a single stock, unlike stocks and futures.
Figure 2: The most common currencies traded.
The advantages of forex trading:
The first advantage of daily forex trading volume as has been previously disclosed $ 3.2 trillion reached in 2007, the highest in history. In addition to, forex trading was 20 times higher than the combined volume of the New York Stock Exchange with the NASDAQ. Forex is also the largest market in the whole world, so the market is also the most liquid market in the world. In the sense that a trader or investor can easily take out or dilute forex trading position, without any significant delay. Unlike the stock market, other commodity futures or options, where the issue of liquidity is still the main focus, especially after the end of the trading day.
24-Hour Forex Trading Market
The second advantage of forex trading is that Forex market has unique characteristics that make a trader or investor can access it more easily without having to wait for the opening of a stock exchange. There is always the center of the world's financial transactions are open, where banks, hedge funds, corporate and private investors to participate (see table 1).
Forex trading participants around the world can carry out the transaction of the day and night. This uniqueness can actually be utilized by workers or employees of nine-to-five (8 hours), because the Forex market accessible to the evening or night. While in the stock market, you can only access the market with a time limit of less than 7 hours a day.
Table 1: Hourly opening for some markets
Forex Trading Buy or sell at any time
The third advantage of forex trading is when trading stocks , short - sell should only be done when the market experienced an up-tick ( the rules that apply to U.S. exchanges ). Sometimes these factors can lead to disappointment for traders because it is only able to see their stock prices fall, and wait for a new tick up to take action . In the futures market, the lower and upper limits apply when the futures contract has traded reached a certain percentage of the previous day's closing price .
Forex trading , however , allow you to sell the currency at any time without having to wait for an up-tick or a certain percentage limits. This means that the execution of the position can be done instantly and efficiently, so that market opportunities can be utilized in both the bullish and bearish markets .
Furthermore forex trading knows no time limit to hold the position. When you have taken a position in the market, you can maintain that position as long as you want.
The tight price difference buy/sell forex trading(Bid/Ask spread)
The four advantage of forex trading is due to the high liquidity in the market, the price spread or difference between supply and demand becomes smaller. EUR/USD can be traded by a margin of only 3 pips (points).
In forex trading, lower spreads make the transaction can reach the level of BEP (break even point) faster. If you buy the EUR/USD at 1.4000, with a spread of 3 pips (assuming no commission) then the 1.4003 price you have reached the break-even point. So as a result of these factors, Forex trading is generally cheaper than equity instruments or futures.
The fifth advantage of forex trading is Forex market offers the highest leverage than the entire existing financial instruments. The use of leverage in forex trading enables you to trade assets with a value much larger than the amount of capital that you deposited.
Forex trading generally has a leverage of 100:1, meaning you can trade currency worth $ 500,000 with only $ 5,000 in capital expenditure. The use of leverage also makes the investor is able to maximize the potential profit with existing capital, because the benefits will always be multiplied by the value of the contract instead of the paid-up capital.
On the other hand, because the chances of making a profit in forex trading leverage, the potential losses are increasing. So that an investor needs to pay attention to the revenue level of risk, and the use of leverage will greatly depend on these points.
Understanding forex trading quotation
Exchange rate or currency of a country is always traded in pairs with another country's currency. This pair is known as pair, while a value or price quotations pair is called forex trading quotation.
Quotation of forex trading is composed of simple components, and reading it is not too complicated, you just need to remember the following three points:
The earliest currency (far left) is the base currency currency. Next (top right) is the currency pair. The base currency is worth 1 (one), and the price shown is the price of the currency against the base currency pair.
When you see the price of the currency to rise, then it always means that the base currency has strengthened against the partner. Conversely when the price of the pair has decreased, then by itself the base currency weakened compared to the middle of the partner.
As a torex trading example, if the quotes like this: EUR / USD = 1.3000, the Euro is the base and USD are the couple. This means that Euro is worth 1 and the USD worth 1.3000 or in other words that to buy 1 Euro, you must exchange your 1.3 U.S dollar. Now, assume that the price has increased to a level of 1.3100, means thatEuro has gained value and 1:31 against the U.S. Dollar.
Base currency in forex trading is the currency that is used as a base exchange major currencies. Because the United States is central to the world economy, the currency was generally used as a base exchange. For example, USD / JPY , USD / CHF , USD / CAD and others.
Sometimes in forex trading, because it is common for market participants using the USD as the trading base price, some currency pairs do not need to write it in full as IDR = 9,000, because by itself is already significant rate against the U.S. dollar.
In other words, trading forex currency, by default USD currency basis, or standard for the exchange of other currencies .
However, in forex trading there are four exceptions where the USD is not positioned as a base. For example, the EUR / USD earlier, where the Euro single currency plays as a base. Another example is the British Pound (GBP), Australian dollar (AUD) and New Zealand Dollar (NZD) .
These four currencies are usually located on the first order (worth one against the U.S. dollar) and the quotation forex were shaped as follow;
GBP / USD = 1.4500, Quotation means £ 1 = U.S. $ 1.4500. EUR / USD = 1.2900 , Quotation means € 1 = U.S. $ 1.2900. AUD / USD = 0.6500 , Quotation means AU $ 1 = U.S. $ 0.6500. NZD / USD = 0.5000, this quotation means NZ $ 1 = U.S. $ 0.5000.
As discussed previously, the increase in the price on the three currency means that their value has strengthened as the base currency and the U.S. dollar has decreased.
Trading forex base on cross trading ( Cross currencies)
Currencies of countries worldwide are also traded against currencies other than the U.S. dolla . When quoted prices are not compared against the U.S. dollar, the currency trade is called a cross. The examples are EUR / JPY , GBP / CHF and GBP / CHF.
Irregular position base in forex trading should not create confusion. Because in general, most major currencies will be placed in first position or serve as a base. If the forex trading currency is not used as a base, it is still necessary to keep in mind on how to read the quotation , as already discussed at the beginning of the quotation conversation.
Points and pips
Price currencies are usually traded with decimal values, two to four decimal places. Every last one change after the decimal values, for example from 1.2900 becomes 1.2901, called the pip (percentage in point). Points are more popularly known as a replacement of pips in the forex trading world.
The Japanese currency, yen, is an example of a currency traded with the use of 2 decimal places after the decimal point. Change the last digit after the decimal point can be said to be the fixed points.
For example: let's say USD / JPY, trading at a price 92.00, if there is an increase reached 92.10, the USD / JPY could be said rose 10 points.
Bid, Ask and Spread
As with other markets that have demand and supply, the forex trading currency price also has two elements, the bid and ask. (See figure 3).
Bid is the price you get for selling the base currency, and is positioned in first place, while the ask is the price you get for buying the currency, is at second base as seen in the picture.
For example, in the figure below, the EUR / USD = 1.3890/1.3893, 1.3890 means that the bid price and the ask price of 1.3893. If you want to buy the EUR / USD then you will get it in the price of 1.3893 (you will pay $ 1.3893 to € 1) and if you want to sell then you will get the price of 1.3890 (you pay € 1 to get $ 1.3890).
Figure 3: Understanding the Bid, Ask and Spread
Figure 3 also illustrates how the concept of quotation occurs in forex trading. Where the Bid is always lower than the Ask. The difference between the bid and ask price in forex trading is called the spread, and the number is generally 3 pips.
Forex trading rollover
Forex trading rollover is incurred when a position is left overnight, and the calculation of forex rollover charge plus others performed at the close of the New York market. Forex position held for one night or more will make you receive or pay a forex rollover interest amount, calculated based on the difference in interest rates currency countries concerned. Specifically for forex rollover, you will receive interest if the currency you bought has higher interest rates than their partner currencies, and vice versa you would pay if the currency rate is lower than his partner.
Example of forex trading rollover is: Assume NZD interest rate is at 3% per annum and USD interest rate of 0.5% per year.
For example: you buy NZD/ USD 100,000 at 0.6000. Means that you have bought a currency that has a higher interest and at the same time selling the currency that has a lower interest rate. Forex trading rollover in this case that the difference would receive interest at 2.5% per annum, calculated and inserted directly into your account every day. 2.5% / 360 days x 100,000 (1 lot) • NZ $ 6.94 U.S. $ 4.16 (assuming the closing price of 0.6000). Trade gaining interest as it is better known as the carry trade. Say you sell NZD / USD at 0.6000. Then for the forex trading rollover you will pay interest if the position is carried overnight by means of calculation and the same amount to the sample above.
Understanding P / L & leverage
The calculation of the profit loss in forex trading transactions are also not too complicated, even when this has been done automatically by forex trading platform available. You can immediately see that orders executed forex trading positions. However as knowledge of profit loss, it helps you understand how forex trading account the profit loss occurs.
If the price of EUR / USD is now 1.2900/03 (Meaning you can buy the Euro at 1.2903 and selling price of 1.2900 euros ).
Assume for the forex trading you have to consider that the Euro will strengthen against the U.S. dollar. Based on these expectations, you buy Euros (simultaneously selling U.S. Dollar) and wait for the price to strengthen.
The next morning, as expected, the Euro has strengthened against the U.S. Dollar. You managed to close position (sell euros) at 1.3000, hence;
= 1.3000 (selling price) minus 1.2903 (purchase price) x $ 100,000 (contract per lot) = $ (0.0097) x 100,000 Total profit = $970
Well now, let's say if the illustration above is a forex trading, the Euro does not move as it turns out accordingly to your expectations and price drops from 1.2900 becomes 1.2850, then;
= 1.2850 (selling price) -1.2900 (purchase price) = $ (-0.005) x 100,000 Total loss you = $500.
Leverage and Margin
Transactions in forex trading are using leverage and margin system. Imagine you are doing a transaction that does not require the full involvement of capital. Because forex trading capital required only a fraction of the real value of the asset.
The use of forex trading capital with a smaller scale than its real value is what is called leverage.
Forex trading usually uses a scale of 1 versus 100. This means that you can make currency transactions are one unit (lot) is equal to U.S. $ 100,000, - using only capital of U.S. $ 1,000 only.
Capital of U.S. $ 1,000 you deposited is known as the margin.
For example, funds you deposit $ 1,000 (amounting to € 790) and buy the EUR / USD worth € 787 at the price of 1.2700 then managed to sell it at the price of 1.2800.
The Forex trading profit of: $ (1.2800 - 1.2700) x $ 787 $ 7.90. So the Return on Investment (ROI) in this trade is $ 10 / $ 1,000 x 100 (%) = 0.79%
By using a 1% margin (or leverage 100), with a capital fund of $ 1,000, you can buy assets valued at $ 100,000. If using the previous example, then the result would be: (1.2800 - 1.2700) x 100,000 $ 1,000.
Return on Investment (ROI): $ 1,000 / $ 1,000 x 100 (%) = 100%
The currency traded
Types of currency in the market are divided into three categories:
USD - exchange rate is important, because 85% of trade is dominated by the USD. EUR - The currency exchange rate for the major countries of the European Union. GBP - Currency Exchange UK. JPY - The Japanese currency exchange rates, typically used for carry trades, as it has the lowest interest rate. CHF - Swiss State Currency Exchange, sometimes referred to as the safest (a safe haven currency). CAD - Canadian currency exchange rate, usually associated with commodity currencies and is closely linked with the price of gold and oil. AUD - Australian currency exchange rate, also called commodity exchange because of high correlation with the gold price.
The currency exchange rate is the most commonly traded currencies are the rates of major or major world currencies. This happens because of the country with great economic capitalization rate currencies tend to have more stable and moving liquid than other foreign exchange rates.