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Welcome to Plan B Trading. In this short segment, we ask the question: What is Forex?
Each country has its own currency, a way of buying and selling goods.
The USA has the US Dollar. The dollar symbol is widely recognised.
Other countries use currencies called dollars, for example, Canada with Canadian Dollars.
To be more specific, the symbol is sometimes prefixed with the initial US to make sure
we understand it is US Dollars being discussed. In trading, the US Dollar is given the abbreviation
USD. This distinguishes it from the Canadian Dollar and other dollar based currencies.
At the time of producing this video, 17 countries in Europe have officially signed up to the
single currency, called the Euro. A handful of smaller countries have adopted the Euro
as their currency in addition to the 17. The symbol for the Euro is like the letter C with
two lines through it. In trading, the Euro is given the abbreviation EUR.
Although a member of the European Union, the United Kingdom opted out of using the Euro
as its currency, preferring to keep the Pound, or sterling as it’s currency.
The symbol for the Pound is shown. In trading, the Pound is referred to as the British Pound,
or the Great British Pound and is given the abbreviation GBP.
If you never leave your own currency area, you might never come across another currency.
As soon as you head off to a different currency area, or country, you might find a need for
some of their currency for your day to day expenses. You could change or exchange your
money with theirs at say a bank, or bureau de change. The process of changing one currency
into another is known as Foreign Exchange. This is often abbreviated to Forex or just
plain FX by traders. Although this is called currency exchange,
it is in fact buying one currency and selling another. There are always two currencies involved
in an exchange, called currency pairs. I am based in the UK and use Pounds in my
everyday spending. Whenever I travel to Ireland, France, Germany and other Euro area countries,
I need to change some Pounds into Euros. I look at the exchange rate to find out how
many Euros I can get for each Pound. With this information, I can decide how many Euros
I want to buy, or how many Pounds I want to sell.
The currency pair is abbreviated based on the two currency abbreviations, for example,
GBPEUR. At the moment, I can get 1.25 Euros for each Pound. If the currency were quoted
the other way around, it would show me that a Euro would buy 0.80 pounds. It does not
matter which of these rates is quoted, I can still change my Pounds into Euros, or Euros
into Pounds. This aspect of changing currencies supports
my travels. However much I travel, my use of currencies is an insignificant part of
the global business of currency exchange. The market in currencies supports the operation
of the global economy. Businesses around the world trade currencies to support their business
activities. The US Dollar has the status of the world’s currency.
As the worlds largest economy, it’s status as the world currency was established by the
Bretton Woods agreement in 1947. The significance of this is that commodities
around the world are priced in US Dollars, whether it is oil, gold or food. That means
any country or business wishing to buy corn or oil based products will need US Dollars
to pay for them. It makes the US Dollar the most widely traded
currency. All currencies trade against the US Dollar.
Each of the currencies traded against the US Dollar is given a nickname.
Trading the Euro is called Eurodollar, or often, just Euro.
The British Pound, or sterling is referred to as Cable, after the first cable crossing
the Atlantic. The Japanese Yen is called Dollar Yen, or
just Yen and The Swiss Franc is called Swiss, or Swissy.
The Canadian Dollar is referred to as the Loonie, or the Canadian. The Australian Dollar
is nicknamed the Aussie Dollar, or simply the Aussie whereas the New Zealand Dollar
is called the Kiwi Dollar, or Kiwi. Over three quarters of all currency transactions
involve the US Dollar. Traders in the Forex market speculate on movements, or volatility
in exchange rates. Before looking at an example, let’s look
at some of the reasons why Forex is so attractive to traders.
The market size is significant. At $4 trillion daily, it’s larger than all of the stock
markets around the world combined. And there are just a handful of currencies to choose
from, rather than tens of thousands of stocks. The liquidity of $4 trillion daily means price
movements are more predictable. 24-hour operation of the market means you
can trade any time of the day, or night, to fit in with your existing commitments.
Brokers provide massive leverage, allowing you to trade huge sums of money with a small
deposit. Let’s have a look at an example. At the beginning of week commencing Monday
20 August 2012, the exchange rate for Eurodollar was 1.2350.
It means for 1 Euro, you will get 1.2350 US Dollars. The first named currency in a pair
is called the base currency. It’s value is always 1.
The second named currency in the pair is called the terms currency. The number, or exchange
rate is is how many of the terms currency you receive for one of the base currency.
Suppose I need to buy some Euros. I am going to buy 200 Euros.
I’ll be selling dollars for this trade. At the exchange rate of 1.2350, that means
I am selling $247 Dollars to buy the €200. I describe my trade as going long, or buying
Eurodollar at 1.2350. By Friday 24th August 2012, the exchange rate
has moved to 1.2500. Let’s close the trading position. Closing a position means doing the
opposite of the original transaction. This means selling the 200 Euros I bought on Monday.
At an exchange rate of 1.2500, the €200 will buy $250 US Dollars, so I receive $250
Dollars when I sell my 200 Euros. Check out the maths.
Monday, I bought 200 Euros and then sold it on Friday. The net number of Euros I have
is €0. Monday, I sold $247 to buy the Euros. On Friday,
when I sold the Euros, I received $250. This is a net profit of $3.
Ok. $3 profit is not much I hear you say. It is still a return of more than 1% on my
$247 investment. In a week. You may recall a mention of leverage earlier.
Leverage allows me to use a deposit. So rather than buying €200, using a typical leverage
of 100:1, I would be buying €20,000, or a hundred times as much money.
When I sold the Euros, I would have received a hundred times more money. This would provide
a profit of $300, a more useful amount. At current exchange rates, a profit of $300 is
around £190 or €240. For many people, that kind of extra income just once a month would
come in handy. By now, you should have a greater understanding
of Forex and trading Forex. You won’t carry physical cash to trade.
You’ll open an account with a broker and all of your trading will be done on line,
over the internet. In many parts of the world, brokers offer
Forex accounts to allow you to buy and sell currencies on line. You’ll be able to trade
currency pairs, even if these do not involve your own currency. For example, my Forex account
is funded in British pounds, yet I can trade Eurodollar with ease.
A further FAQ “What is a Forex account?” takes a look at the types of Forex accounts
and how they operate, plus the costs and commission charges.
In some parts of the world, traders can take advantage of spread betting to trade Forex.
If you still have questions, why not call 0203 603 4983 and talk to a trader now.
You can practise trading the Forex markets on Plan B’s training programmes. Get started
by booking Trading 101, or have a chat with one of our traders by calling 0203 603 4983
now. You can find more information about coaching
and our training programmes and you can book online at www.planbtrading.com