[2] What is Forex trading? What is a Forex deal?
The investor's goal in Forex trading is to profit from foreign currency
movements.
More than 95% of all Forex trading performed today is for speculative purposes
(e.g. to profit from currency movements). The rest belongs to hedging
(managing business exposures to various currencies) and other activities.
Forex trades (trading onboard internet platforms) are non-delivery trades:
currencies are not physically traded, but rather there are currency contracts
which are agreed upon and performed. Both parties to such contracts (the
trader and the trading platform) undertake to fulfill their obligations: one
side undertakes to sell the amount specified, and the other undertakes to buy
it. As mentioned, over 95% of the market activity is for speculative purposes,
so there is no intention on either side to actually perform the contract (the
physical delivery of the currencies). Thus, the contract ends by offsetting it
against an opposite position, resulting in the profit and loss of the parties
involved.
Components of a Forex deal
A Forex deal is a contract agreed upon between the trader and the market-
maker (i.e. the Trading Platform). The contract is comprised of the following
components:
• The currency pairs (which currency to buy; which currency to sell)
• The principal amount (or "face", or "nominal": the amount of currency
involved in the deal)
• The rate (the agreed exchange rate between the two currencies).
Time frame is also a factor in some deals, but this chapter focuses on Day-
Trading (similar to “Spot” or “Current Time” trading), in which deals have a
lifespan of no more than a single full day. Thus, time frame does not play
into the equation. Note, however, that deals can be renewed (“rolled-over”)
to the next day for a limited period of time.
The Forex deal, in this context, is therefore an obligation to buy and sell a
specified amount of a particular pair of currencies at a pre-determined
exchange rate.
Forex trading is always done in currency pairs. For example, imagine that the
exchange rate of EUR/USD (euros to US dollars) on a certain day is 1.1999
(this number is also referred to as a “spot rate”, or just “rate”, for short). If
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