What is Forex?

Forex=Foreign Exchange

Forex is the buying and selling of foreign currencies in order to make a profit.

Think of it as speculating the success of a certain country’s economy and then purchasing or selling that country’s currency depending on if we thought it was going to go up or down.

The amount of Forex trades daily beats the socks off of the stock market, making it the largest financial market in the world with over $3 trillion traded globally on a daily basis.

Forex is convenient as a mini-mart because it’s open 24-hours a day 5 days a week and gives you much more power than you would in the stock market. Because it’s so liquid you can trade instantaneously.

Your money super-sizes itself

Your money goes a lot farther because Forex gives you a high leverage. This high leverage is a result of there always being someone ready to buy or sell. This means a small deposit controls a much larger sum in the market.

Example: your $500 can ultimately control $100,000. Just a 0.5% movement in the market can double your money!

How you Make Money in Forex

Making a trade in Forex is similar to making a trade in the stock market. A few terms you need to know are "long" and "short".

Long: when you buy a currency, you are "long" in that currency.
Short: when you sell a currency, you are "short" in that currency.

Simply said - you go long when you think a currency is going to up and you short it when you think it’s going to go down.

Opening and closing a position

Open position: a live and ongoing position is a result of buying (or should we say going "long" in) a currency pair (let's say EUR/USD pair-meaning we are buying the Euro against the exchange rate with the dollar). Your open position will fluctuate with the exchange rate.

Close it!: Ok so we see the EUR/USD we went long in isn't earning much and we want to close it. We do this by going short (selling) our EUR/USD currency pair.

Real Life Example:

A trader purchases 10,000 Euros in the beginning of 2001 when the EUR/USD rate was .9600.

Euro=+10,000 Dollar=-9,600

In May of 2003 the trader exchanges his 10,000 Euro back into US dollar at the market rate of 1.1800.

Euro=-10,000 Dollar=-+11,800

In this example, the trader earned a gross profit of $2,200. Because the Euro's exchange rate with the dollar went up!

Buying and Selling

If you buy EUR/USD you have bought Euros and simultaneously sold dollars. The euro is the base currency. You would make this choice if you felt that the Euro was about to kick some US dollar butt!

If you sell the EUR/USD, you will profit if the dollar kicked some euro butt!

So when you see a currency pair the currency listed first is the base currency and you buy or sell that base currency (the first listed currency in the pair)

It’s important to understand when you buy a currency you are paying the offer price of 1.32 and when you sell a currency you don’t pay (in this case also 1.32) until you close your trade by buying.

You buy or sell in Lots which are made up of units.

The CKFX platform uses the following:

• Starter Account: 1 Lot = 10,000 units for the starter
• Standard Account: 1 Lot= 100,000 units for the standard account.

What is a pip

Pips are how you measure your profit/loss in Forex.

Profit=P and Loss=L. Referred to as P/L!

The pips are displayed in the rate box below. The euro is at 14 pips and the dollar is at 17. The difference between 14 and 17 is 3 so that means it is a 3pip spread.

Now draw your attention to the exchange rate. The pip is the last decimal place. So in the EUR it is 1 and in the USD it is 8. That means that the USD is currently 7 pips higher.

The goal is to get and keep pips because they equal profit!

Calculating Profit and Loss (P/L)

If we buy a lot of 100,000 of the EUR, a pip on the EUR/USD currency pair is worth $1. But how would we know this?!

The formula: 1/10000 X Amount Traded = pip value

EUR/USD at an exchange rate of 1.3191(.0001 / 1.3191) X EUR 100,000 = EUR 7.58 x 1.3191 = $9.99878 rounded up will be $10 per pip

But what if we only bought 10,000? Again- let's repeat the formula and use 10,000 in place of 100,000

EUR/USD at an exchange rate of 1.3191(.0001 / 1.3191) X EUR 10,000 = EUR .758 x 1.3191 = $.999878 rounded up will be $1 per pip

Pay attention: Now in the above formulas we used .0001 as the value of the pip because we see the exchange rate has four decimal places. (ex:1.3191).

If the exchange rate has only 2 decimal places (ex:1.31) than we need to change our above equation to .001 for the pip value in the places we have .0001.

On to learn about margin, leverage and rollover ⇒