Many of us have heard of Foreign Exchange and many of us have heard of Forex Trading but not many of us know what they are and how to get involved.
So, what is Forex trading?
Forex trading has been around since the beginning of currency itself, flourishing with the introduction to traveling overseas as well as trading goods overseas.
When someone goes abroad, they will need to use the currency of that land to purchase goods. Forex exchanges were born from this. Authorized vendors will exchange currency and take a small commission.
There is a huge demand in industry as far as exchanging currency is concerned. For example, a manufacturing company that produces pens. It may be that the factory is located in the UK. The plastic for the pen itself was produced in England so no need to exchange currency to purchase that. The ink is produced in Sweden and the labels for the pens is produced in France.
What does this mean? It means that there must be currency exchanged to procure the goods. Great British Pounds will be exchanged to Swedish Krona to purchase the ink for the pens. The same Great British Pounds must be exchanged to Euro to purchase the labels.
Nowadays when hearing the words Forex, it is more commonly in reference to Forex trading.
In Forex trading, users can speculate on the performance of one currency against another for entertainment purposes and to turn a profit. Essentially Forex trading is placing bets on the performance of a certain country's currency against another country's currency.
All major currency pairs are paired against the US dollar and all ‘majors’ make up around 80% of the foreign exchange market:
AUD/USD, EUR/USD, GBP/USD, NZD/USD, USD/CAD, USD/CHF & USD/JPY.
Initial intrigue in the world of Forex can blossom into something profitable with the right tools and conditions. Education is important before anyone starts on their trading path.
We can appreciate the sheer scale of Forex trading when we take into account that - in excess of $5 trillion is traded every day!
How does Forex work?
The currency exchange rate is the going rate a particular currency can be exchanged for another currency. As mentioned earlier, Forex is quoted in pairs i.e AUD/USD.
Rates of exchange can be affected by several economic factors like recession, government debt, political instability, to name a few. These factors may influence your decision on whether to ‘buy’ or ‘sell’ a currency pair. Buying is referred to as ‘going long’ while selling is referred to as ‘going short’.
When we think of historical trading, this was only reserved for individuals with high amounts of capital - the wealthy. Traders would need high volumes of cash because leverage had not been introduced.
What does Forex leverage do?
It gives the ability for traders with low amounts of capital to trade the same volumes as someone who historically would be perceived as wealthy. It allows the ‘little man’ to compete in a market traditionally considered to be reserved for the elitist.
For example, without the use of leverage to place a trade worth $100,000 with 1:1 leverage, the investor would be putting up the whole $100,000. An astronomical amount of capital for the average person but perhaps not so much for a person in power or from an elitist background. As the old added saying goes ‘'money makes money’’.
When we start to investigate the world of leverage we can see how the ‘average Joe’ can compete and trade the same amount of volumes thanks to the magic of leverage.
For example: $100,000 (volume) / 500 (leverage 1:500) = $200.00 (capital needed to invest in that trade)
So we can see that the average user does not have to come up with $100,000 to get involved thanks to 1:500 leverage reducing the initial investment to $200.00. Leverage has revolutionized the trading world in that users can put up much less capital but maintain the same earning potential.
Math behind leverage
Without leverage, a trader that wanted to trade on their favourite pair e.g EUR/USD
Entering a trade on the forex market without using leverage a contract size of 100,000 per lot a trader would need around $130,000.00. Thanks to leverage and high leverage options available, one would only need around $260.00 to enter that trade.
To work out how much margin (capital) is required to open a position one can use the following formula.
Buy trade: Ask price x contract size / leverage
Sell trade: Bid price x contract size / leverage
1 lot = 100,000 contracts (contracts worth is based on the underlying instrument which in this case is EUR.)
EUR/USD, 100 000 Contracts are worth 100 000 units of EUR.
What is important to consider before you trade any currency pairs, is the types of analysis to explore. Within the world of Forex Analysis, there are 3 fundamental types: Technical, Fundamental and Sentiment.
Technical analysis is the structure in which traders read into and study price movement. Traders make use of charts, graphs, as well as technical data to determine the history of price movement on a certain asset. Followers of technical analysis believe the use of historic charts can indicate how prices will move in the future.
Fundamental analysis is the general overview of the performance of the economy, employment rates, interest rates, and GDP to name a few. With a collection of this, traders can try to predict how a certain currency may perform based on the current stability of that country.
Sentimental analysis is having an overall feeling of the performance of an asset. Often traders draw on psychology and feel to make a decision and trade on certain Forex pairs.
All 3 forms of analysis should encompass an overall decision when placing a trade. Without one form of analysis, it is common that a trader will not have the full scope on how the market may move. So, it is important for a traders knowledge base - to explore all areas of analysis.
How can I trade forex?
To start trading, we first need to find an arena that facilitates Forex trading with the best conditions. When users are thinking of how to invest in forex they will first need a platform best suited to them. When searching for the most suitable broker for you, there are some important factors to take into consideration such as security, deposit methods, transaction speed, execution time, cost and one of the most important aspects: leverage!
When searching for the right broker for you, it is massively important to take into account the leverage available. There are hundreds of brokers in the Forex market sphere who offer high leverage but this can often come at a heavy cost. The amount a client may have to initially deposit for a tiered account may outweigh the amount a prospective trader is willing to invest. E.g. ‘’Gain access to 1:1000 leverage by depositing $2,000.00 today’’
New on the market are Vantage, an emerging ECN/STP Broker who offers its clients 1:500 leverage without any signup fees, monthly charges or any kind of ongoing surcharge. Users can take advantage of up to 55 currencies and 31 cryptocurrency markets all backing into the award-winning MetaTrader4 platform.
The leverage that Vantage offers is much higher than the industry average with the maximum at a generous 1:500 for trades on Forex pairs and metals coupled with some of the best spreads in the industry. Compared to many other brokers, there is no minimum deposit requirement to gain access to this fantastic leverage on offer.
An exhaustive list of maximum leverage offered by Vantage as follows
Forex - 1:500
Metals - 1:500
Energy - 1:200
Indices - 1:200
It is important when considering a broker to not compromise trading conditions specifically for high leverage. Certain brokers on the market may offer amazing leverage up to 1:1000 however they may lack in other areas. A big one of these would be cost. Often with high leverage comes a high cost or commission taken by the broker.
At Vantage this is certainly not the case.
The commission is charged at $6 per lot per trade. If one was to use a smaller lot size, then the commission would naturally be less. For example, a trade carrying a lot size of 0.1 - this would carry a commission of $0.60.
When we compare the trading costs to other brokers, it is often the case that the higher the leverage available, the higher the cost attached to individual trades. Not with Vantage. The same commission applies to a Crypto trade of 1:100 as it would to a Forex trade of 1:500 assuring the user that costs are consistent and a mathematical breakdown is not necessary every time a trader gets involved in their favourite currency pair.
The tier one liquidity used allows Eagle FX to offer tight spreads and create a competitive trading environment.
In an ever-growing world of online commerce, gaming, trading, etc there is an ever-increasing demand to maintain privacy and keep personal information secure. This is especially important when we are sharing personal information online. Vantage understands this and provides an environment for its users to remain virtually anonymous - cutting out any potential threats of its users' personal information being compromised or sold/passed on to third party companies.
It is not uncommon in the world of trading for sales teams to take client information with them to new ventures. Vantage policy eliminates this potential hazard and rules out any potential annoying cold calls at all hours of the day.
To conclude, we can see the benefit of trading with higher leverage. Prospective traders can get involved in high volume trades with the peace of mind that they do not have to front a great deal of capital. The beauty of high leverage is the potential return on a relatively low investment. Leverage truly does open doors for potential traders in a world that was otherwise considered elitist!
Start with Vantage today and take advantage of high leverage available in a user-friendly space, with access to 24/7 support, and with a ground-breaking feature in that new clients simply have to verify their email address to gain access to a professional and practical trading environment. Good luck!