Forex is the largest and the most liquid market in the world. Speculators exchange foreign currencies on this market using leverage. However, you should bear in mind that forex entails risks!
Do you know the term ‘forex‘? In the world of financial experts, it is one of the most frequently used words, which means an exchange of foreign currencies. Forex market is the most liquid market in the world on which pairs of currencies are traded globally. Daily volumes of transactions exceed USD 5 trillion. Major currency pairs include EUR/USD, USD/JPY, GBP/USD and USD/CHF. The US dollar is the most frequently traded currency.
Forex profit and loss
Using leverage products and financial derivatives is an inseparable part of forex. They allow traders to multiply their gains but also incur high losses. It depends on the direction to which an exchange rate moves. Markets are open 24 hours five days a week.
To better understand forex trading, refer to the following model situation:
The currency pair will be EUR/GBP. We will monitor its movement on 17 July 2020 between 10 am and 3 pm. An investor will use EUR 10,000 of his capital. The table compares outcomes of different leverage ratios. The investor speculated on decrease of the EUR / GBP currency pair.
*Fees: The table shows ‘spread’, a brokerage fee calculated from the trader’s profit as a difference between the buy and the sell price. For fees and details of the calculation, refer to the BCM documents.
Let us assume that the investor opened the position on 17 July 2020 at 10 am when the EUR/GBP pair achieved 0.9078 and closed the position on the same day at 3 pm when EUR/GBP was at 0.9123. In this time period, the EUR/GBP value grew by 0.5%. The investor speculated in a wrong direction. EUR/GBP goes up, which means that the investor incurs loss. In the opposite situation, he would generate profit.
When trading with the EUR/GBP currency pair, leverage of up to 1:30 is applied through CFD. Our model in the table also shows a possible profit/loss if a lower ratio or no leverage is used. In the latter situation, the investor would incur a loss of EUR 50, which becomes more significant when using financial leverage. A leverage ratio of 1:10 in this case results in a loss of EUR 50 and the maximum permitted financial leverage for retail investors, i.e. 1:30, causes a loss of EUR 1,500, which is thirty times more than without using leverage. However, the same multiple applies to the profit. If we change the direction of the client’s speculation under this scenario, i.e. speculation on decline, the trader would generate a profit of EUR 1,500 using the maximum possible financial leverage ratio.
Ban on providing the product to everyone
Due to the profitability of trading CFD and other leverage products, a provider may not provide the product to everyone pursuant to the Capital Market Undertakings Act. First of all, the provider must assess the client’s experience, property and preferences using an investment questionnaire. Based on its outcome, products may be provided, ranging from risk-free ones to those bearing the highest risk. A credible and experienced investor should not have a problem with CFD trading authorisation.
Formerly, forex trading was a domain of large institutional investors while these days, anyone who likes taking a risk may trade on the forex market thanks to online platforms. You can also use “investment robots” that trade automatically on your behalf. They respond to pre-defined signals with a scalable level of risk. Apart from being precise, their advantage is that they never sleep. They can trade 24 hours a day when the forex market is open. They do not get tired and lack emotions, thus saving work and effort.
Future vision What will be better? High-quality global investors or robots that will think instead of you? The human element still prevails. At least anyone with common sense knows that a strategy available to everyone cannot bring higher than average profits in the long run. Human intuition still has the upper hand!Go back