How does FX trading work?
Foreign exchange traders (trading) usually trade five days a week. Only if the analytical tools show a clear trend is it worthwhile for them to take action. This means that on uncertain days, trading should simply be suspended and the risk of loss should be avoided. When trading, the trader constantly observes the prices that change every second in the ten-thousandth job range. This fourth digit after the comma is called “Pip” in technical jargon. Since in foreign exchange trading the positions are usually resold after a short time, often within hours, the bank has to bear only the risk of relatively small price fluctuations in this short period of time. In technical jargon, the sale means “smooth”.
Let us assume that, based on analyses and trends, the euro is expected to rise. For example, the foreign exchange trader enters the foreign exchange market with USD 100,000 through a broker and buys euros for this amount. For example, the entry rate is 1,0600 euros at 1 dollar. In fact, the price rises rapidly within 2 hours. At the price of 1.0648, the forex trader decides to “smoothly” place the purchased position by selling it and thus exit the market.
In summary, the euro exchange rate at dollar =
1.0600 The foreign exchange trader buys for 100,000 dollars = 106,000
euros The exchange rate rises = 1.0648
The foreign exchange trader sells = 106 A
daily gain of 480 euros is not worth the day’s gain (0.0048) = 48 pips
Absolute gain = 480 euros
For a stake of 100,000 U.S. dollars. However, due to the “margin” system mentioned above, the stake is only ten percent of this sum. This means that the 480 Euros will be realized with a capital investment of 10,000 US dollars! This corresponds to a profit of 450.78 US dollars at a price of 1.0648. In the above example, a daily return of 4.5 percent was achieved in less than 24 hours.
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Let us assume that, on the basis of analyses and certain trends, a falling euro is expected. The forex trader enters the foreign exchange market through a broker with 100,000 US dollars. He is adeating a sale order for the broker in the amount of 100,000 US dollars. The sales price is 1,0600 euros at 1 US dollar. In fact, the price drops within 4 hours. The forex trader then decides to “smoothly” position the sold position by buying it at the price of 1.0550 and thus to exit the market.
In summary, the
euro exchange rate at dollar =
1.0600 The foreign exchange trader sells for 100,000 US dollars = 106,000 euros
The exchange rate falls = 1.0550
The foreign exchange trader buys = 105,500 euros
exchange rate gain = 50 pips
Absolute profit = 500 euros
Although the foreign exchange trader does not own euros, he can place a sales order to the broker in an above-mentioned manner, because the buyback will “smooth” the position within 24 hours. This means that foreign exchange or forex trading can make profits as prices rise and prices fall. In the last example, the actual capital input is only one-tenth of the volume of trade. So it made a profit of 500 Euros and 473.93 US Dollars with 10,000 US dollars. This corresponds to a return of 4.74 percent within 24 hours.
Entstehung des DevisenhandelsWie alles begann
Origin of foreign exchange trading
International foreign exchange trading began in 1880 with the possibility of crediting foreign payments to a separate account abroad. The release of exchange rates in 1972 led to changes in the world economy on international financial markets. Stock, foreign exchange and interest rate markets experienced unprecedented price fluctuations. As a result, the need for effective instruments for effective and efficient capital management increased significantly. The economy in general, finance, and state governments were looking for ways to minimize price and price risk.
The major and state banks, in particular, finally took over this function via a telephone trade through which these institutions trade the most important currencies of the world with each other for 24 hours around the
world. Thus, a market independent of the actual stock exchange is thus formed.
In the meantime, all courses are displayed on computer screens, but the actual business is still completed on the phone and can be traced at any time by recording the corresponding conversations on
tape. Official prices do not exist, the brokers are orientated on benchmark prices, which are constantly adjusted by the Reuters agency around the clock every second to the current market situation.
Until 1991, this market was a domain of the major and state
banks. Today it is composed of:
Foreign exchange market
- Central banks, Landesbanks
- Commercial banks
- Foreign exchange brokers
- Private foreign exchange traders
All participants are subject to the strict banking supervision of your country. Since the convertibility of European currencies, it has become customary to trade all currencies only against the US dollar and no longer against each other. The broker (foreign exchange broker) replaces the stock exchange floor and serves as a central point of supply and demand. On request, the market constantly quotes bid and offer prices that are only valid for a moment, so these prices are constantly changing.