FOREX – What is it? How it works?
The forex market, or FOREX is the largest market world in terms of money moved daily, with more than 5 trillion dollars transacted daily. To get an idea of the size of daily transactions, we can compare with the US stock market which trades around USD 60 Billion against more than 5 Trillion in FOREX.
It is a market that works continuously, 24 hours a day, between 22:00 GTM on Sunday and 22:00 Friday’s GTM. This allows for a greater volume and more time to carry out operations, which increases the overall volume and helps to have more operations, and therefore more profit.
Since 2004 the Forex market has grown exponentially, due to the emergence of Online Forex Brokers, and for the development of a platform named MT4 that revolutionized the way of trading, offering clients a practical, simple and understandable way. Meta Trader 4 is nowadays used by a large part of Forex Brokers and is available for Android and IOS. Today, as long as we have Internet access, we can be connected to the market and trade anywhere and anytime in our FOREX account. The MT4 platform is free and very light.
How does it work in FOREX?
Forex trading involves the purchase of one currency and the simultaneous sale of another, that is, the currencies are traded in PAIRS, for example: the Euro and the Dollar (EUR/USD). The investor does not physically buy dollars or euros, but a monetary exchange relationship between them.
Thus, when someone makes a trade in this market, he is not buying a certain currency, but a certain PAR, an exchange rate between the two currencies. With the fluctuation of rates and the relative value between currencies, different investment strategies can be structured, which can result in profits or losses.
Normally, currency quotes do not change drastically over a short period of time, which should raise doubts about the veracity of the high-yield promises that often accompany FOREX investment offers.
But then how is it possible to have high profits in this market?
The answer lies in the use of “margin” to trade, a mechanism that allows you to trade a larger volume of money by investing just a part. As the transaction is settled only by the difference between the valuations of different currencies, it is not necessary for the investor to have the entire amount of funds involved in the transaction available. FOREX allows you to effectively deposit only a “margin” to cover the daily variations of currency pairs.
The margin gives the investor greater power to operate, thus being able to carry out large-scale transactions. In most Brokers or Brokers, the margin is 100:1, it can go up to 500:1, allowing the investor / trader to make a transaction with a reference value of 100,000 dollars, for the example of 100:1, depositing only 1,000 dollars.
This structure allows you to make higher PROFITS, BUT IT ALSO ENABLES GREATER LOSSES. The logic is the same, in fact, because as the value that can be negotiated with a given investment is multiplied, so are the results, positive and negative. In this sense, the ideal is to always work using only a small part of the available margin so that, in case there is a market change, there are no high losses.
Let’s look at an example of a FOREX trade with leverage (margin).
In the previous example, if the investor had actually bought euros (1.0500) and then sold (1.0550) when they appreciated, he would have gotten a modest return (less than 0.5%, that is, US$ 400 at $105,000). In addition, it would have been necessary to disburse US$ 105,000, an amount beyond the reach of the large
