What is Forex? Forex trading, what is it?

Many people say that they can get rich quick when trading forex. However, the tempting lure is not necessarily accompanied by an understanding of what forex trading is, both its characteristics, advantages, and risks. Maybe you've heard the word "Forex" As an introduction, we will discuss forex itself. 

What is actually "forex"? Forex is an acronym of Foreign Exchange or exchange of foreign currencies.

The more common term is foreign exchange. Forex trading is trading currencies from different countries with the aim of making a profit. In this case, forex stands for Foreign Exchange. An example of forex trading is buying Euros (major European currencies), while simultaneously selling USD (American currency), which can be abbreviated as EUR/USD.

In the shadow of a layman, the notion of forex trading is the activity of exchanging money in a Money Changer, which is buying and selling foreign currency manually through a money changer. In fact, forex trading is different from manual transactions such as in Money Changer.

Generally, a person's goal to buy and sell money at a Money Changer is because of the need to exchange currencies for transactions in different countries, so that there is a physical exchange of money. Whereas forex trading is done online with the aim of gaining profit. It needs to be understood, and forex trading is a business activity, investment, and even a profession.

On an international scale, foreign exchange trading is carried out by various parties, ranging from the government, central banks, multinational companies, to certain individuals who have large assets. Currency trading transactions among various parties do not occur in a market with physical buildings, but in an invisible network called the "forex market".

Along with technological developments, forex trading reaches a wider scope. Through the internet, forex trading can now be done by anyone, anytime, anywhere. Now, everyone can trade forex. You and I can also trade forex online easily and with capital as small as 10 dollars.

The principle of online forex trading is quite simple, which is to get a profit from the difference between the purchase price and the selling price by making a purchase transaction when the price is low and the transaction is selling when the price is high.

For example, we buy US dollars as much as $100 when the exchange rate of the Rupiah against the Dollar is at a value of IDR14,250. The rupiah we spend to get the $100 becomes IDR1,425,000. A week later, the US Dollar grew stronger until the exchange rate became IDR14,300.

If we sell the $100, it will make a profit of IDR50,000. Well fortunately, we get money. In simple terms, the purpose of forex trading is to gain profits from the rise and fall of currency exchange rates. This can be achieved because the conditions and prices in the forex market move very dynamically, can change at any time to quickly respond to economic, political, war, disaster, etc.

Even for regions with advanced and strong economies such as the United States, Britain, the Euro Zone, or Japan; there is little sensitive information, so the price of the currency can move up and down. This is what traders see as an opportunity and opportunity to make a profit.

Online Forex trading with the aim of gaining such profits is done through the brokerage of forex. The capital needed is very affordable, we can start from only $10, or even free using bonus funds provided by the broker.

There is a slight difference between forex trading through an online broker and foreign exchange transactions that may be used by most of our people in banks or money changers. Almost all online forex brokers facilitate forex transactions with a contract and margin system. The following are some points related to online trading (with a margin system).

1. Direction of transaction

Also called "two-way opportunity." That is, you can still look for profit opportunities when the market is rising or falling. There are two types of transactions: buy and sell. BUY transactions are also often referred to as LONG, while SELL is also called SHORT.

If the price is going up, then BUY (LONG) transactions can be done to make a profit. Conversely, if prices are going down, don't worry because by making a SELL (SHORT) transaction you can also make a profit.

2. Trade object

In this case, the object of trade is still the same. What is that? Of course money. But here what you transact is a contract based on the value of that currency. Maybe a little confusing. No need to be confused, later there will be further explanation about this.

But simply, consider just doing certain currency transactions as if buying a certain country's "shares." The movement of the value of the country's currency is an indirect picture of market sentiment towards the country's economy. There are several currencies called "major currencies." They are currencies of developed countries and are widely traded on the world money market.

Internationally, the currency symbol consists of three letters. The first two letters represent the identity of the country of origin of the currency, usually the initial of the country. The third letter is the initial of the name of the currency.

For example: USD. The first two letters (US) are initials from the name of the country: The United States, also known as the United States in Indonesian. What is unique is CHF , the currency symbol of the Swiss franc. CH is the initial of "Confoederatio Helvetica", which is the Latin name of the Swiss Confederation, while the letter F is the initial currency: franc.

3. Trading time

It has been mentioned that the time that forex trading lasts 24 x 5, which is 24 hours a day and 5 days a week. This is because the world financial market runs alternately in a day. The following is a table of world trade time.

Whereas if you do an ordinary foreign exchange transaction, you have to wait for the money changer or the bank to open. For the record, banks in the United Kingdom on average do not serve forex transactions above 3 pm or 4 pm UTC .

4. Leverage and Contract Size

Online forex brokers apply leverage to carrying out forex trading. With this leverage, relatively small funds can make transactions with a much larger contract value. This is because of leverage services, which if we interpret it as "leverage."

Maybe it would be easier if we analogous to the car jack. With a jack, you only need a little power to be able to lift the body of our car that maybe weighs hundreds of kilograms. Well, the "way of working" leverage is roughly like that car jack earlier. Examples of such applications are:

In brokers that apply 1:100 leverages, then you only need a fund of $ 1,000 to make a transaction worth $ 100,000. The amount of $1,000 is called a margin, while the transaction value of $100,000 is called Contract Size.

That is, the capital you need is only 1%. Whereas if you do a conventional foreign exchange transaction, to transact for $100,000, you must provide capital worth $100,000. In other words, the capital you need is 100%.

5. Bid/Ask price

In forex trading, a currency pair is traded on a BID and ASK price base. BID price is a benchmark for you if you want to do SELL transactions, whereas ASK prices are the opposite, it is a benchmark for you to make BUY transactions.

The example of the BID price is 1.30000, while the ASK price is 1.30020. So if you want to make a BUY transaction, then your transaction will be carried out at the price of 1.30020. Conversely, if you want to do a SELL transaction, then your transaction will be carried out at a price of 1.30000.

You can also see that ASK prices are always higher than BID. The difference between ASK and BID is what we call a spread. BID is also often referred to as BUY. This means that this price is used by traders if they want to BUY from you.

On the contrary, ASK has another name as SELLING EXCHANGE, which means that traders always use this price when they will SELL to you. Thus, based on the example above, if you are going to buy EUR from a trader then the price is 1.30020 per USD. Conversely, if you want to sell EUR to traders, the price is 1.300 per USD.

6. Pair selected

It was mentioned earlier that the currency is traded in a currency pair. Before going any further, we will study the currency pair itself. Judging from the type, currency pairs are divided into two:

  • Major Currency Pairs, or Majors, are currency pairs involving major currencies and transacted against USD. Included in the major currency pairs are EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CHF and USD/CAD.
  • Cross Currency Pairs, or Cross Rates, are currency pairs that do not involve USD. For example EUR/GBP, EUR/CHF, GBP/JPY and others.

The first currency we refer to as the base currency, while the second currency we call the counter currency. When you make a BUY (BUY) transaction, you actually BUY the base currency and at the same time SELL a counter currency.

Conversely, when you make a SELL transaction, what you do is SELL the base currency and at the same time BUY the counter currency. This is one reason why you can do a SHORT (SELL) first when the price drops.

For example, when you SELL EUR/USD, the more EUR/USD prices go down, the more profit you get. OK, you already know that there are majors and cross rates. Now, you will learn how to read prices that come from the exchange rates of currency pairs.

7. How to transact

Technology is increasingly sophisticated. Nowadays everything is online. Want to pay electricity bills, send money to friends or family, or even shop, you don't need to go out again. All you need to do is just turn on the computer, connect to the internet, then the transaction occurs, even so forex trading.

To do foreign exchange transactions, all you need is a computer connected to the internet. There are even some brokers who provide mobile trading facilities for their customers. With that facility, you can make transactions through your PDA or smartphone.

Compare the practicality if you have to come to a bank or money changer to make a transaction. Apart from various advantages, forex trading can be likened to a double-edged sword. Forex trading can make us rich, but also can instantly erode our capital.

No matter whether you consider forex as one type of investment or as a normal trade, it is clear that forex trading risk is high. The biggest risk comes from the price movement itself. If you can analyze market conditions and make transaction arrangements properly, then profits can be obtained.

But what if your analysis is wrong? To overcome the emergence of unwanted losses, every person who will be involved in the world of forex must understand clearly so that it will run a successful trader. READY TO PROFIT!