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Lesson 2: Introduction to Forex part 1

Forex for Beginners, forex

Forex for Beginners, forexWhen we go to treat the Forex, we go to treat scenarios that directly affect our lives. For example, we purchase a product that is built outside the monetary area of belonging. The final price of this product not only affected by the production costs but will also be important the evaluation of the exchange rate which can bring savings for the ultimate purchaser but also an increase in costs.

The relationships between different currencies affect all international trade. A peculiarity of this market is, therefore, the opening and closing times. We are used to the standard stock exchange markets, which have restricted times daily opening and closing. On the contrary, there is an opening in the Forex on Sundays at 5 pm and closed on Friday at 5 pm (Central Time). This because, as mentioned above, the currency market affects all international trade and could not be restricted to certain hours.

Having the possibility for the Forex to be open at all hours also creates an additional path to the development of our analysis. The overlap of the zones of the different financial centres that produces an increase of volatility at intersections.

Forex for Beginners, forex, Forex market hours

 

As we can see, the large and most interesting overlap occurs between the London market, the most important in Europe, and New York. At this time, the volatility increases dramatically due to a large number of operators that influence the supply and demand of different currencies. So, the probability to have a high volatility during the overlap of the two financial centres (London and New York) is very high.

The one between London and New York is not the only overlap; there are also those of Sydney and Tokyo and Tokyo and London.

The lack of a physical headquarters in Forex with predefined times of daily opening and closing makes it​ OTC, it means an Over The Counter market. Trading takes place directly between two parties without going through a stock exchange. This way you can easily access the online virtual market anywhere in the world.

As mentioned in the previous chapter, the Forex market is the largest and most liquid in the world with over 4 trillion in daily trading. Trade for about 90% speculative and generated not only by the large investors and investment banks but also by private investors with small capital through the​ leverage.

For example, if we invest with a leverage of 1:100, we invest 1 of capital, but we manage, we work, and we get the results on a capital of 100. The leverage, then, is a double-edged sword because our profits, but also our losses are multiplied compared to our real investment. It is a plus that offers us the market, but only if we use it well there might be benefits for us.

Another important aspect regarding the Forex is that it is​ bi-directional, that is, we have the opportunity to earn both upward and downward.

In the Forex market, we are going to buy and sell a currency compared with another one (currency pair). So when we buy a currency pair (going long), we buy the base currency (the first), and we sell the quote currency (the second). When, instead, we sell a currency pair (going short) we sell the base currency, and we buy the quote currency.

For example, if we decide to sell USD-CAD all we do with our operation is to sell US Dollars and buy Canadian Dollars. If we buy EUR-JPY, we are buying Euros and selling Japanese Yen.

To close the trade that we have opened, we have to do the opposite to the previous trade. If, for example, we have bought Euro and sold British pounds and we want to close the trade, we have to buy in equal measure English Pounds and sell Euro in order to have a balanced net position. An operation that is done directly from the trading platform when we give the order to close of the trade.

 

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