Investing in forex or forex is buying one currency while another is sold. If the currency you have purchased increases in value against the currency you have sold, you can close your position with profits. If not, you will get a loss.
What are currency pairs?
Investing in currencies always involves the sale of one currency to buy another. For this reason, they are operated in pairs that show which will be purchased and which will be sold. Each currency within the pair is represented by a three-letter code: two letters that normally correspond to the region and another that designates the currency itself.
GBP / USD, for example, is a pair of currencies formed by the pound sterling (in English, Great Britain pound) and the US dollar (US dollar). By trading this pair, you are buying pounds and selling dollars.
Base currency and quoted currency
The first currency that appears named in the pair is called the base currency, and the second currency is the quoted currency. The price of a pair is determined by calculating how much a unit of base currency is worth in the quote currency.
Therefore, in the previous example, GBP is the base currency and USD is the quote currency. If the GBP / USD quotes at 1.35361, it means that one pound equals 1.35361 dollars.
If the pound rises against the dollar, then one pound will be worth more dollars and the price of the pair will increase. If the pound falls, the price of the pair will fall. So, if you think that the base currency of a pair is likely to strengthen against the quoted currency, you can buy the pair (go long). If you think you are going to weaken, you can sell the pair (go short).
The spread is the difference between the purchase price and the sale price of a currency pair.
As with other financial markets, when you open a position in forex you are offered two prices. If you want to open a long position, the purchase price operates, which is slightly higher than the market price. If you want to open a short position, the selling price operates, slightly below the market price.
What is the leverage in the forex?
Leverage allows you to get exposure to large amounts of currency without having to commit a large part of your capital.
A pipo is a very small unit of movement, and although currency pairs tend to be very volatile, they often do not move very widely. For this reason, forex investors may operate with large groups known as lots, or use leverage.
What is a lot?
A standard lot is 100,000 units of a currency. However, there is also the possibility of operating with mini lots or micro lots, which are equivalent to 10,000 and 1,000 units respectively.
Individual investors do not always have 100,000 pounds, dollars or euros to perform each operation, so many forex providers offer leveraged products.
The benefits of leveraged trading
Leverage allows you to open a position without having to pay its full value in advance. To open an operation in the EUR / GBP, for example, only 0.5% of the total value of the position could be needed.
When you close a leveraged transaction, the profit or loss is based on the total size of the position. Although this allows the possibility of obtaining greater benefits, it also carries the risk of greater losses, which could even exceed your deposit.