Forex market is a
cash or (‘spot’) interbank market is the largest financial market in the world, with a volume of over $3.2 trillion a day. If
you compare that to the $25 billion a day volume that the New York Stock
Exchange trades, you can easily see how enormous the Foreign Exchange really is. It
actually equates to more than three times the total amount of the stocks and futures
markets combined. Forex really rocks!
Forex is the short form for Foreign Exchange. We will be considering it today in the form of
currency trading. i.e. Exchanging the currency of one country for another for
the purpose of profit making.
In our daily lives, we exchange one thing goods and services. You part
with your naira and receive the article e.g Biro or computer that you need. Every
for another. We exchange our time/skills for money (salary) every month, which
is also an exchange.
In forex/currency trading, you exchange currency for currency. You trade
currency. You use currency to buy and sell currency and making your profit
doing the same thing. Basically you buy a currency when the price is low and
sell it when the price is high. You sell it when the price is high and buy it
back when the price is low making profit at this vicious circle of upward and
downward movement in the prices of international currencies fluctuations.
In conventional trading, you exchange money for article. In forex, you
exchange the currency of one country for another. The article here is Currency.
All what we are doing is CURRENCY TRADING
Increase in the value of one currency against another. Time value of
money is in play when trading currency. A dollar in the morning could be lesser
or higher than a dollar in the afternoon. Same goes for any other country
currency.
CURRENCY QUOTE EXPLAINED
This is a typical currency quote
S B
EUR/USD = 1.4120/1.4123
Where (EUR) – (It is not a must that it must be (EUR) It could as well be
any other currency) the first currency listed on the quote is the base currency
USD – (it could as well be any other currency) – the second currency on
the quote is the COUNTER CURRENCY
The 1st quote (1.4120) = Selling price
The 2nd price quote (1.4123) = Buying price
This is how you will see the quote on any platform.
The difference between the buying and the selling price is THE SPREAD.
This is where the forex broker that provides the platform to you make their own
money.
The base currency, anywhere you see it is always expressed in 1 (one)
quantity. As above, the EUR = 1.
The counter currency (USD) is expressed in term of at how many quantity
of the counter currency will you buy or sell (1) one of the base currency.
The answer to this is provided in
the figures that follows (1.4120/1/4123)
If you are buying 1(EUR), the price is 1.4123
If you are selling 1(EUR), the price is 1.4120
Now that you have mastered the currency quote, when you BUY
1. You
are buying the base currency
EUR/USD = 1.4120/1.4123
The meaning is that when you see this quote, you feel that for 1 (EUR)
to be quoted at 1.4123 – (buying price), you feel it is very cheap and the
price (by your analysis which you will master later) you now buy it at a cheap
price, hoping to sell it when the price increases. That is where the law of
buying at low price and selling at a high price comes in. This is what every
business men and women does every day.
2. When
you sell, you are selling the base currency
This means that as in
our quote above, for the price of 1(EUR) to 1.4120 (selling price), you feel
that EURO is overpriced (by your analysis which you will master later), and you
feel that the price will fall later. What you will do is to sell it at a high price,
so that you can buy it at a low price. Eg. If you have a computer valued at
150,000 and you feel by tomorrow, the price of the computer will reduce to say
N100,000. If you sell it at the rate of N150,000 and buy the same brand of
computer the following day at N100,000 when the price is reduced, you have gain
back your computer, and you have gain N50,000 by taking advantage of the
knowledge of possible reduction of the price of the computer. This is how a
forex trader make his money.
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