As a continuation to the Forex article series we've talked about in the previous articles, let's now delve into the mathematics behind the system, and how to get started...
Here’s something that you should really accept in becoming a Forex trader: You have to be great in Math. This is not to discourage you, it’s just something that you have to be good at so you can be truly profitable with this new undertaking you’re considering.
Do you need to learn complex Math? No. Actually, what you need is just very simple mathematics – the set of Math that can make you understand basic numerical operations and some understanding about decimals. If you’re good enough with that already, then we shouldn’t have any problem at all.
Successful traders are not all excellent mathematicians, however, all of them are people who really love working with numbers. They might not be that good with Algebra or anything similar, but they are the kind of people who can think mathematically in the most efficient manner. As a Forex neophyte, do your very best to adapt to that skill – it’s the best and only way so you can proceed smoothly with your trading journey.
Now, let’s hop into the typical act of trading. Whenever you do business with Forex, you’re not only dealing with one currency but 2 currencies at the same time. Such an intertwining is called a “currency pair.” The main concept of gaining or losing revolves around the value of 1 currency in comparison to another.
Comparing and trading currencies can be easily understood by putting them side by side, or by looking at them from left to right. Let’s break down a simple example of pairing the most popular currencies ever: Dollars and Euro. When the “Euro to US Dollar pairing” is equal to 1.20, it means that your 1 Euro will be converted into 1.20 if you do some trading at that particular moment.
For another pairing, let’s say the US Dollar to Canadian Dollar pairing is equal to 1.25. It also means that your 1 Dollar will also be raised to 1.25 if you trade it with that currency from Canada. Even though there are 2 currencies involved in a trading act, they act as a single currency from the eyes of the Forex market itself. Just like in investing in a particular stock, an investor will gain some profit when he buys a currency pair. When the value of those currencies rise, so does his investment.
Another way investors make money is through speculation. For instance, if an investor feels that the economy of Europe will rise way faster than that of the US, it will make him believe that the Euro will have more power than the US Dollar. The investor will then buy the Euro-Dollar pairing based on his analysis. If that pairing’s value becomes high, he will gain money. Conversely, when the value of the Euro-Dollar drops, he will lose some of his earnings.
Now, let’s dig a little deeper into the main key aspects of the Forex market. Let’s talk about the term called “Margin.” When you trade using this method, it means you will only put up a certain percentage of the total investment given by a Forex Broker. The amount you need for that is often called “Margin Requirement.”
There is also this term called Stock. With it, you are allowed to borrow funds from your Forex broker. However, trades can only be covered using your existing Forex account. This means that a new investor can’t borrow funds to begin. A newbie trader needs to put in some funds into a newly created Forex account. Only then can he start trading.
In using the Margin method, you have to be aware that how much you can earn is dependent on the value of the currency pairings and the price of the trade that’s taking place. The size of a pair is basically called “Lot.” The most notable sub-categories for this are standard lot, and mini lot. A standard lot is known to carry a value of 100,000 units, while a mini lot has 10,000 units.
Depending on your broker firm’s policies, you may also start with just 1,000 units. Such a value is called a “micro-lot.” The value of a Margin requirement can be as small as just 2% of the total investment or it could be as large as 20%. But for most trading activities, the average margin requirement falls within the 3 to 5% range.
Let’s understand how the margin requirement value is calculated with another example. Let’s say the pairing of Euro-Dollar has the equivalent of 2.40 and is invested with 2 standard lots. That should make us calculate 2.40 x 200,000, resulting in a capital of 480,000 Dollars. That’s a huge amount, one that can surely make you acquire big profits along the way.
The good thing is that you don’t really need to pay that exact amount so you can begin trading. What you really have to pay is just the margin requirement. If its value is just 5%, then you will only need to pay 2400 Dollars.
From that concept, another term called “leverage” should be introduced. It is something that enables an investor to control a huge amount with just a small value of money. We can say that if an investor has 120,000 Dollars, he can control that with just an amount of 3,600 Dollars because it’s the 3% of the real amount – the actual value of the margin requirement.
The existence of the leverage method is one of the most important elements of the Forex market, as many analysts claim. But many experts also claim that it is one of the biggest risks investors may come across. It may give an investor the highest earning potential, but conversely, it can also make way for the greatest of losses.
Whenever a trading act happens within Forex, we have to remember that there are 2 currencies involved each time. And as stated above, the 2 are actually viewed as just one. It means that while you’re lending 1 currency of the pair, you’re also borrowing on the other side.
Such activity is what the lending rate policies of a certain country are really all about. To sum all of the technicalities up, we can just arrive at the understanding that the entirety of the trading within the Forex market is this: when the value of 1 country’s currency goes high, the currency of another country goes low.
By taking advantage of such kinds of events, a Forex investor can be a very big winner in the shortest time imaginable. Consequently, though, a careless trader could also become the biggest loser of all time.
Starting Forex Trading
Knowing the basic requirements so you can start your first Forex adventures.
First, you have to be within the “legal-age bracket.” This means that if you’re lower than 18, you can’t do some trading just yet. Sorry kids, you’re gonna have to grow up for a few more years before you can get rich with the Forex market.
The cool thing though is even if you’re a kid, you can make a “practice account” in which you’ll have the benefit of enjoying some “Forex play money.” When you are already old enough and have gained some knowledge and experience, you can then use that to your advantage later in adulthood.
Another thing to have is your valid ID. Government-issued IDs could really come in handy in this requirement. You can also use your driver’s license, your passport, voter’s ID, or whatever ID card that can declare proof of your real identity. You need these as pertinent documents so that your presence in the Forex world can be validated.
You also need proof of your address. Those billing sheets about your electric bills, water bills, and similar related documents should be ideal enough as they can give sufficient proof that you really are a resident of a certain area of your town. Or you can just get a residency clearance from your government municipality’s office, that should also be good enough.
You also need to have a bank account, or some of those platforms that can hold digital accounts for your finances such as Paypal, Paymaya, Skrill, or Stripe. There are so many of them out there. What you just have to bear in mind is that almost all of the long-running platforms that are similar to the ones mentioned can be a really good storage area for your Forex earnings.
For the equipment needed, your smartphone will do. You may also use a laptop, a desktop PC, as long as they are connected to the internet. You will then use such devices to connect to the online Forex brokers that are practically just very easy to find.
Before you begin with your trading journey, you need to make sure that you are prepared to lose. Although Forex can really make you extremely rich in just a few moments, it can also make you more broke than you ever were in your life.
