FOREIGN EXCHANGE

The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange. It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers.

Benefits of Foreign Exchange Trading:

1. The largest participants and highest transaction volume.
2. High liquidity and instant execution.
3. 24-hour market.
4. No time limit to hold an open position.

Margin Trading

Margin Trading is trading with a borrowed capital. Generally the contract size 1 lot = US $ 100,000 but to open it is necessary to have only 1% to 10% of the sum depending on the currency you trade. Margin Trading allows us to leverage a position, in essence trading much more than their initial deposit.

To summarize, the main advantages of Forex are:

1. The biggest number of participants and the largest volumes of transactions.
2. Superior liquidity and instantaneous execution of trades based on online quotes.
3. The market is open 24 hours a day, every working day (Excluding Saturday).
4. A trader can open a position for any period of time he wants.
5. Tight spread between buying and selling prices.
6. An opportunity to get a higher profits that the invested sum.
7. Ability to open short position

The investor to trade $100,000 then he must have a 1% margin. With a margin of 1%, a client can sustain an adverse move of 100,000 of the currency. The client can also use a 1% margin and trade $100,000 – much larger sum. His account however will now only be able to sustain only a 1% adverse market movement.

Example of a Forex trade

Buy EUR 1 lot at 1.2700 (New)
€100,000  x 1.2700 = $ 127,000.-
Selling back EUR 1 lot at 1.2800 (Liquid)
€100,000 EUR  x 1.2800  = $ 128,000.-                 
Profit       = US $     1,000 (Profit)
Assumption: 1 Euro = 1.2500 USD
US $ 1,000 is converted in EUR, so the profit is EUR 800.
If 100% margin is used, the client has to deposit €100,000 into his brokers account.
ROI = 800/1,000=0.8%

However, if a margin of 1% is used, only €1,000 is required as an investment
ROI = 800/1,000 =0.8%

Although the ability to earn significant profits by using leverage is substantial, leverage can also work against investors. For example, if the currency underlying one of your trades moves in the opposite direction of what you predicted, leverage will greatly amplify the potential losses to the same extent as it will the profits. To avoid such catastrophes, FOREX traders usually implement a strict trading style that includes the use of stop and limit orders.