How does forex actually work ???

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Chrisl
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How does forex actually work ???

Postby Chrisl » Tue Aug 04, 2009 6:05 am

Hi there
I'll get straight to the point and since this is a newbie thread I am not gonna feel to stupid about asking this...
Ok...I understand that currencies goes up and down and all I need to do is place a buy or a sell...simple? suppose if one leaves it there..but I need to know the inner workings
I'll start by saying what I 'think I know'..A standard lot is one buying 100 000 units of a currency ie: eur/usd 1.4320 meaning one euro equals to 1.4320 dollar I buy a hundred thousand dollars and if it goes up 1.4330 I liquidate my position and take the profits... am I right...
What happens when you sell???? surely you cant sell something you dont 'own'...
This is a bit of a silly question,but would appreciate if someone can explain to me....
'You only see what you have learned to see,everything else is invisible'
...Mark Douglas

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monolisa
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Postby monolisa » Tue Aug 04, 2009 7:54 am

Hi Chrisl,

I think you have the general idea. Hint: each pair has a base/counter currency.

Good basic stuff here:
http://www.goforex.net/forex-basics.htm

Lis
"Know your enemy and know yourself, find naught in fear for 100 battles. Know yourself but not your enemy, find level of loss and victory. Know neither your enemy or yourself, wallow in defeat every time." - Sun Tzu

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noone22
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Re: How does forex actually work ???

Postby noone22 » Tue Aug 04, 2009 11:30 am

Chrisl wrote:What happens when you sell????
surely you cant sell something you dont 'own'


I was in the same boat couple of years ago,
when I cannot understand conception
of selling "short" at all.

Actually, you are not selling (what you don't own).

Assume, that you're borrowing 100,000$ from your broker
under the deposit of 2,000$ (or your own money = your account),
and then - you spend these money ($100,000) to buy or to sell.

Note, you have to have $100K in both cases - if you want to buy,
or if you want to sell.

So, before each trade - you need to take a loan
from your broker. This loan is always in your disposal after
you've opened an account with broker, and
no paperwork involved, it's just the rules of this game - Forex.

This buy/sell is quite different from usual buy/sell of physical goods,
because each Forex buy must end with sell (later on), and vice versa.
It's not actually just buy - it's buy with obligation to sell,
and if short - it's sell - with (your) obligation to buy.

Assume these $100K as a loan,
which you are taking from your broker to do a trade.

If you sell first - you'll spend these borrowed $100,000,
and (in case of win trade) you'll get back gross of $100,200.
Broker will take its commisions (if any) -$25,
your nett profit = $175.

So, at the end of the day - you will still have
your account of $2,175
increased by $175 as a result of short trade,
broker will earn its $25,
and you don't own $100,000 anymore -
you've returned it back to the broker
after holding for several minutes or hours.

If you lose - your account size will decrease (unfortunately),
you have to cover trade loses & commissions in this case as well.

But you cannot lose more than $2,000 (your account size),
if your lost will reach this point - broker would explicitly
close your positions and liquidate your account.

Also, you cannot steal these $100K
(let's say - buy and try to run away),
because they're not real money,
they're "virtual" ones, and only your broker
could manipulate with them to get cash.

What I can say at the end - read 100-200 threads from this forum
("Never Lose Again" and "Drain the Bank" inclusive),
and this confusion (as well as thousands of other ones)
will eventually dissappear.
Note, it will take time and efforts to get used
to trading terms and tricks.

If you don't know some terms or their meanings, use
search at http://www.google.com
or http://www.investopedia.com
to find out.

For example, investoedia is describing short selling as follows:
http://www.investopedia.com/terms/s/shortselling.asp

What Does Short Selling Mean?
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Chrisl
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Postby Chrisl » Tue Aug 04, 2009 12:26 pm

noone22..... much appreciated
had a bit of a a-ha moment there
Thanks...
'You only see what you have learned to see,everything else is invisible'

...Mark Douglas

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monolisa
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Postby monolisa » Tue Aug 04, 2009 12:31 pm

Interesting readings:
http://www.tradingmarkets.com/.site/for ... -Forex.cfm
http://www.thesmartdollar.com/forex/positions.htm

I think forex is a little bit different from share trading as you acutally long(buy)/short(borrow) at the same time.

Lis
"Know your enemy and know yourself, find naught in fear for 100 battles. Know yourself but not your enemy, find level of loss and victory. Know neither your enemy or yourself, wallow in defeat every time." - Sun Tzu

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