What is forex trading? You might asked.
A simple example of currency trading (forex trading) is as follows:
Last month, Mr. Jack purchased USD 1,000 / 00 (United States Dollars) which USDIDR exchange rate was Rp. 7,500.00. Then, this month USDIDR exchange rate was Rp. 8,500.00. This means there is a difference of Rp. 1,000.00. If Mr. Jack sells dollars that have been bought months ago, then he will get a capital gain (8,500.00 - 7,500.00) = 1,000.00 USD. 1,000,000.00.
Surely this will happen if the exchange rate rises. If the exchange rate moves in opposite direction, Mr. Jack will experience a capital loss, amounting to the difference of the exchange rates, as simple as that.
So, how it works more or less the same as money changer, but it is actually not 100% the same. In the money changer, you physically change money and receive the results physically as well. In forex trading, different things happen. It is done by a method Called margin trading and no physical money is involved.
In the forex trading, currency is traded in pairs, like USDGBP (United State Dollar Great Britain Pound agains) and USDYEN (United State Dollar Japanese Yen agains). There is a lot traded currency pairs and you can select one or several of the couple. If you choose a partner USDGBP for example, you can not buy or sell currencies other than USD and GBP, Because of the pairing system. So, choose the best pair for yourself.
Of all the investment instruments on the stock exchange, forex trading is the largest in volume, about USD 2 trillion per year. This makes it tens of times larger than the commodities market (such as coffee, rubber, gold, etc.), making it as the most liquid market in the world (the market that makes the participants in it can easily sell or buy commodities).
This is a huge market, which is active 24 hours a day 5 days a week (due on Saturday and Sunday market cap). Market can be active 24 hours a day due to open alternately, starting from Europe, America, Asia and Australia.
Technological developments also influence the forex transaction. Whenever and wherever, as long as the market is active, you can easily trade, both selling and buying. You can observe the price movements on your computer screen with ease, and when it felt the price was right you can take immediate action. This transaction is called Dealing Quote.
One thing you should know is that forex trading should be done through a broker. You can not directly buy or sell currencies to the market, but must go through a mediation firm called the broker. It is they who will forward your order to the market.
This method gave birth to a concept known as margin trading Trading. Margin can be interpreted broadly as a collateral. This is different from the trade via a money changer who disebuah spot market. Here, the trade done one on one, without any margin or collateral.
Confused? Here is the explanation.
Let us assume that the currency pairs that we use is the EURUSD, which EUR 1 = USD 1.5. This means that 1 euro is equivalent to 1.5 U.S. dollars. A few days later, an increase in the EURUSD exchange rate, of which EUR 1 is now is $ 1.65. This means that 1 euro is equivalent to 1.65 U.S. dollars.
Difference between spot trading with margin trading is described as below.
Spot Trading:
Mr. Jack bought EUR 100 dollars U.S.. This means that capital gains earned by Mr.. Jack is as follows:Margin Trading:
(1.65 - 1.5) * 100 = 0.15 * 100 = 15 dollars
Mr. Jack bought EUR 100 U.S. dollars through a broker. This broker offers leverage of 1:100. Means that profits earned by Mr.. Jack is as follows:Can you see the difference? That is the "beauty" of margin trading system. I'll explain what it is leverage. Leverage is an interesting concept that will maximize your capital gains, BUT at the same time can also maximize your losses!
(1.65 - 1.5) * 100 * 100 = 1500 dollars!
In the example above, the leverage used by the broker is 1:100. That is, for every $ 1 Mr. Jack will be worth $ 100. You may wonder, how this could happen. Quite simply, as the name implies, the margin means collateral, which the amount of collateral is referred as leverage. To leverage of 1:100 as the example above, this means the value of collateral is 1% of the value traded. So, as the transaction above, Mr. Jack actually purchase euro for $10,000 rather than $100 because of the leverage (1:100)!
Pretty interesting, eh?
