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Examples of Forex Trading
The concept of trading in the foreign exchange market is based on the reverse operation of one currency to buy another currency, or to sell another currency and profit from it. You can use almost every currency in the world for such transactions. Let us analyze some examples.
Example 1: You hold 1600 U.S. dollars (USD) and the exchange rate of British pound to U.S. dollar (GBP USD) is 1.6000, that is, you can buy 1,000 British pounds (GBP) with 1600 U.S. dollars (USD). You bought 1,000 pounds (GBP) and expect that the British pound (GBP) will rise against (USD). After a while, the British pound (GBP) against (USD) rose to 1.6100. According to this exchange rate, you can exchange 1,000 British pounds (GBP) for 1,610 U.S. dollars (USD). In this way, you get a profit of 10 U.S. dollars (USD).
Example 2: Let us assume that you hold 1,000 British Pounds (GPB) and the exchange rate of British Pound to U.S. Dollar (GBPUSD) is 1.6000. You convert your pound sterling (GBP) to 1600 U.S. dollars (USD) and hope that the pound sterling (GBP) will fall against the U.S. dollar (USD). After a period of time, the exchange rate drops to 1.5900, and you decide to perform a reverse operation and buy British pounds (GBP) with 1,600 U.S. dollars (USD) at this exchange rate. As a result, you have 1006.28 pounds (GBP). In this way, you get a profit of 6.28 pounds (GBP).
Based on these examples, we can draw several conclusions:
- You can make money in two ways: when one currency appreciates or depreciates against another currency.
- One currency will always appreciate or depreciate against another currency.
Currency pairs, cross currency pairs and their quotes
The main tool of the foreign exchange market is currency pairs -the ratio of one currency to another. There are more than 100 kinds of goods on the market. Currency pairs. Some currency pairs have larger trading volumes, while others have smaller trading volumes. For example, 66% of all trading volume comes from major currency pairs (major currency pairs).
These currency pairs are Euro U.S. Dollar (EURUSD), British Pound U.S. Dollar (GBPUSD), U.S. Dollar Japanese Yen (USDJPY), U.S. Dollar Swiss Franc (USDCHF), Australian Dollar (AUDUSD) and U.S. Dollar Canadian Dollar (USDCAD). You have noticed that every currency pair contains the U.S. dollar (USD). This is because the U.S. dollar (USD) is a world reserve currency. The U.S. dollar (USD) will participate in all currency transactions.
Those currency pairs that do not contain the U.S. dollar (USD) are called cross currency pairs. The calculation of the exchange rate of these currency pairs needs to be done through the United States dollar (USD). For example, the euro yen (EURJPY) currency pair is calculated as follows: from the euro/dollar (EURUSD) to the dollar/yen (USDJPY).
When you look at the foreign exchange market quotation table, you will see that there are two prices in front of each currency pair: the buying price and the selling price.
The currency that ranks first is called the base currency. All operations are carried out through the base currency. Take EURUSD as an example. You will sell or buy Euros (EUR) in U.S. dollars (USD) according to the required amount. If you have another currency in your account, for example, if you have a British pound (GBP) account, in order to complete the Euro-U.S. dollar (EURUSD) transaction, the British Pound-U.S. dollar exchange operation will be automatically performed, and the trader does not need to bear any fees, Without taking any unnecessary actions. Everything will be done automatically.
The currency behind the currency pair is called the quote currency. It is an expression of the base currency price. If the euro/dollar (EURUSD) = 1.4000, it means that 1.4 U.S. dollars (USD) can buy 1 euro (EUR). The currency ranked second represents the ratio between the two currencies. This ratio is called the quotation.
In classic accounts, the quotation format has four decimal places. * The smallest change in the quotation is calculated with the last decimal place, called a point. For example, the euro/dollar (EURUSD) changed from 1.4000 to 1.4001. That is, the exchange rate of the currency has risen by one point. However, the four-digit price format is only a feature of classic accounts. NDD and ECN accounts use a five-digit price format. * This allows you to observe changes in quotes based on decimal points.
*Currency pairs with Japanese Yen (JPY) display quotations in 2d decimal format (NDD and ECN are 3d). For the USDJPY currency pair, the quote is similar to 84.85. If the exchange rate rises to 84.86, it means that it has risen by one point.
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Ask Price and Bid Price
When you look at the foreign exchange market price list, you will see the two prices in front of each currency pair: the buying price and the selling price. The buying price is always higher than the selling price. The selling price is called the selling price, and the buying price is called the buying price. The buy order will open at the bid price and end at the ask price. The sell order will open at the ask price and end at the buy price. The difference between the selling price and the buying price is called the spread. Spreads are calculated by points.
Foreign exchange market margin and leverage
There are two very important terms in the foreign exchange market: margin and leverage. Foreign exchange transactions usually involve a large amount of funds (a standard transaction is 100,000 units of the base currency). However, not everyone wants to conduct such a large number of transactions, so we can always conduct a smaller volume of transactions (for example, 0.01 lot or 1000 units of the base currency). This is why traders can use leverage.
Leverage allows traders to carry out large transactions with only a small amount of funds in the trading account. FBS offers different ratios of leverage: from 1:1 to as high as 1:3000. For example, you decide to use a leverage of 1:100. Therefore, to make a standard lot transaction, you need to invest 1000 units of currency. In this way, 1000 units of currency will be the margin you want to provide.
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Comment by Diletta
March 26, 2024
Awesome bonuses, good leverage. A few hiccups, but support rocks!