Entering the world of forex for the first time can be confusing. New concepts, new theories, new words; it can leave one slightly bewildered. We're here to tell you a story; a story that will show you that the fundamentals of the industry are actually not so complicated to grasp.
This is the story of one trader's experience…
Disclaimer: Please note that the story and characters are fictional and none of the events of the story should be taken or misunderstood as investment advice.
Meet Michael.Michael is a chemistry professor from New York City who has spent the past month teaching in Europe through a professor exchange programme. He has 750 euros in savings and he wants to open a bank account in US dollars. His 750 euros are equivalent to 1000 dollars at the time that he opens his bank account.
A couple of weeks later, Michael is reading up on financial news on his laptop and he sees that the euro has risen in value against the dollar. This means that his savings have increased and Michael sees this as a good opportunity to withdraw them.
It's midnight however and the banks are shut, so Michael decides to stop by the bank the following day after work to withdraw his money. Come daytime, the euro plummets in value and it is now pointless for Michael to withdraw his money. He has missed a chance to take advantage of this trading opportunity.
That evening, Michael goes out for a meal with some of his colleagues and the topic of conversation is forex. One of the other professors, Isabelle, is telling everyone about her experience in forex trading. Michael finds what she has to say very interesting and the notion of trading online sounds very appealing to him, so he decides to look into it some more.
Michael looks online and finds a forex broker. After examining what this broker has to offer, he decides to open an account with them. Through this account he discovers incredible possibilities.
Through the use of LEVERAGE, Michael can deposit his 1000 dollars and be given the potential to trade with up to 500,000 dollars. Leverage is used to increase the buying power and the potential risk of losses of a trader, even if they can only provide a small deposit.
The next time the value of the dollar rises, all Michael has to do is log in to his trading account and sell his dollars. He is extremely pleased with the profit he has made and is grateful that the market moved in the direction he wanted it to, otherwise he could have suffered losses that could have resulted to the loss of his invested capital.
Michael learns the ropes of forex trading; he understands the risks involved in forex trading and begins to use TECHNICAL ANALYSIS and FUNDAMENTAL ANALYSIS to follow the market and predict which direction it is moving in.
Technical analysis includes studying charts to follow market trends, whereas fundamental analysis involves keeping up to date with economic and political indicators which may affect price movement. All of this information is available on his broker's website.
Depending on the state of the market, sometimes Michael has a BEARISH OUTLOOK and other times he has a BULLISH OUTLOOK. When he is feeling bearish, he predicts that the value of an asset will fall and he takes a SHORT POSITION, which means he sells this asset. When he is feeling bullish, he takes a LONG POSITION, which means that he predicts that the value of an asset will rise and so he buys it.
Michael is lucky that his broker offers low SPREADS. A spread is the difference between the BID PRICE (the maximum price that a buyer is prepared to pay for an asset) and the ASK PRICE (the price that a seller is prepared to accept for an asset). The lower the spreads, the less money a broker is charging for their services.
Michael continues to trade forex online for many years to come. He experiences both profits and losses over the years; sometimes he makes mistakes and miscalculations, other times he hits the nail on the head and gains high profits to show for it.
Definitions:
Leverage
In the forex market, a broker is able to provide a client with leverage; this allows investors to take greater advantage of fluctuations in exchange rates than they could have on their own. If a broker offers leverage up to 1:1000 for example, a trader's buying power is magnified 1000 times. Leveraged products do carry risk since there is a possibility for losses greater than the amount invested.
Technical Analysis
Technical analysis is used by traders in an attempt to predict the direction that the market is bound to take. Common components of technical analysis are charts which record market activity.
Fundamental Analysis
Fundamental analysis refers to the way political and economic events affect the health of the market and influence the direction it takes.
Bearish Outlook
The definition of a bearish outlook is when a trader adopts a negative outlook about the economy, predicting that the market will decrease and that the prices of certain assets will fall.
Bullish Outlook
The definition of a bullish outlook is when a trader adopts a positive outlook about the economy, predicting that the market will rise and that the prices of certain assets will increase.
Short Position
This defines the position traders take when they predict that the value of an asset will decrease. They sell this asset in the hope that they will buy it later on at a lower price.
Long Position
This defines the position traders take when they predict that the value of an asset will increase. They buy this asset in the hope that they will sell it at a higher price later on.
Spread
Spread is the difference between the bid price and the ask price of an asset.
Bid Price
This is the price an investor is prepared to sell an asset for.
Ask Price
This is the price an investor is prepared to buy an asset for.
Article source: forextime