What is Forex?

Currency trading also known as Forex or FX trading can be described as the currency exchange market. Forex trading refers to the global, decentralized marketplace where individuals, financial institution and companies exchange one currency for another at floating rates which are given by actual market situation. Forex includes all the currencies in the world.

What is the currency pair?

A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency.

Currency pairs compare the value of one currency to another — the base currency (or the first one) versus the second, or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency. For example, let’s take most traded currency pair in world – EUR/USD. If value of currency pair EUR/USD is 1.2500, to get one EUR (base currency) you will need pay 1 USD and 25 cents.

How do I earn money trading currencies?

In Forex market you are betting that one currency will be valued more compared to another currency in the future. Forex is the biggest and most liquid market in the world, so the prices of currency pairs change all the time. For example, if a price of EUR/USD changes from 1.25 to 1.30 and you have one EUR and decide to change that to USD you will get 1 USD and 30 cents instead of 1 USD and 25 cents. Thanks to Forex, you can benefit on a movement of currencies in bigger scale thanks to leverage and margin.

Although a dramatic change of demand for diamonds, loved by almost every woman, is not in the nearest predictions, production volume in 2018 was lower than in previous years. Global production of raw diamonds accounted for 147 million carats according to the Statista.com statistics. In 2017 this number was higher – at 151 million carats in total value of more than 14.1 billion USD.

Production down by 4 million carats will probably push the diamonds price upwards in the nearest time frame. When looking at historic price evolution, it can be noted that investments into diamonds brings a very interesting yield over the years. In 1960, the price for 1 carat floated around 2700 USD, in 2015 over 15.000 USD and 31.000 USD in 2016. That represents a 106 percent rise in 16 years.

In the first half of 2018 the prices rose at about 5 to 6 percent level, the growth in the second half of 2018 was influenced by excessive supply of small diamonds with lower consumer performance, in Indian and Chinese markets. The strongest focus was directed onto stones with pink and blue colors, with blue being the color that outperforms all other colors since only a minimum of newly-mined stones reach the market. Only diamonds with blue color that may be found in auctions are those that were mined earlier and whose owners decided to sell. That is why their purchasing power increases.

Russia belongs to major producers, with a volume of 19 million carats mined in the last year. Then comes Australia with 17 million carats volume, Democratic Republic of Congo with 15 million carats and Botswana with 7 million. Russia also owns biggest supplies of diamonds in the world, the volume is estimated to 650 million carats. As a comparison, Democratic Republic of Congo owns supplies in the volume of 150 million carats.

Since 2009 till 2016 diamonds production faced drops in the volume by tens of million carats, when compared to previous times. 2017 was the first year after a major rundown, production increased again and reached the level of 150 million carats per year.

 

Currency trading markets became the biggest and most liquid markets in the world, they became also a magnet for speculators that bet on financial derivates and use leverages.

Forex (also known as FX) is one of the most used words in the world of financial traders. Forex is an abbreviation of Foreign Exchange and it represents exchanging foreign currency. Its market is the biggest and most liquid market in the world, where currency pairs are traded. Daily trading volumes of carried out transactions peak over 5 trillion US dollars. Currency pairs EUR/USD, USD/JPY, GBP/USD and USD/CHF belong among the main currency pairs that are traded. Most traded currency is US dollar. The markets are open 24 hours a day, 5 days a week.

With forex trading comes inherently the usage of leverage products and financial derivatives, that enable the traders to use multiplication of their profits. Using contracts for difference (also known as CFD) with leverage effect leads to high profits even when the currency pairs move just a tiny bit. But it also leads to high losses, if the exchange rate moves in the other direction than what the trader expected.

For a better understanding of forex trading using financial leverage, we prepared a model case with real currency pair exchange rate movements. The currency pair will be EUR/USD. We will now watch the movement on 25 July 2019 between 2.15pm and 3.45pm. The investor will use 10,000 EUR of his own capital.

The table shows the comparison of results when using various levels of financial leverage. The investor speculated on price growth.

 

A model comparison of CFD trading using financial leverage and the EUR/USD currency pair
EUR/USD 25 Jul 2019 2.15pm- 25 Jul 2019 3.45pm
leverage	Value at the opening		Value at the closing		Change (in %)	Investment (EUR)		Profit/ Loss (EUR)				Spread (EUR)
1:30	1.1106		1.1181		0,67	10,000.00		- 2,010				80.4
1:10	1.1106		1.1181		0,67	10,000.00		-670				26.8
1:1	1.1106		1.1181		0,67	10,000.00		-67				8.04

 

*Charges: the table shows so-called spread, that is a charge of the broker which is calculated from trader’s profit from the difference between buying and selling price. More information about charges and detailed calculations are available in https://goldenbrokers.net/.

 

Let’s assume that the investor opened a position on 25 July 2019 at 2.15pm, when EUR/USD currency pair had the value of 1.1106 and then closed the position on the same day at 3.45pm when the value was 1.1181. In this time frame the EUR/USD value rose by 0.67 %. The investor speculated in the wrong direction. EUR/USD is growing which means a loss for the investor. In other case, he would gain profits.

When trading with EUR/USD currency pair using CFD, the leverage may be applied up to 1:30, our model shows also the situations and profits/losses when traders use lower leverages or do not use leverages at all. In the last case the investor would end up with a loss of 67 EUR. This loss becomes more substantial with using leverages, since 1:10 in this case creates a loss of 670 EUR. The maximal allowed leverage for retail investors, 1:30, creates a significant loss of 2,010 EUR, which means 30 times higher loss in comparison to not using leverage at all. It is true, that the profits work in the same way. If we changed the investor’s speculation direction, e.g. he would speculate on decrease, the trader would earn 2010 EUR when using maximal allowed leverage.

The broker is prohibited by capital markets trading law to allow these products to everyone, due to high risks connected to CFD trading and other leverage products. The broker must firstly asses experience, financial situation and client’s preferences through investment questionnaire. Based on its result he may offer products from the least risky to most risky. A solid investor with experience should not have any problems with CFD trading authorization.

 

Robots start to add to the massive spread of online trading

 

Trading brokering through online platforms is so easy that it destroyed most barriers between individual traders and markets, like forex, that were previously only open to big corporate investors.

But there is still a significant progress ongoing at this easily accessible online trading. “Investment robots” belong among the newest technologies. These robots also trade with forex and create trades automatically instead of the trader. They react to pre-set signals with adjustable risk level. Apart from precision of their work they also have another advantage – they never sleep, which means they can trade in forex markets for all 24 hours a day. They do not yield to tiredness or emotions and save work and effort. Do the robots beat the world’s best investors? Not yet. We should firstly warn everyone from robots, or better said their operators, that promise great profits. All people that have at least basic education of economy know well, that a strategy that is available to everyone cannot bring above‑average profits in long-term to everyone. Human intuition and invention still prevail.

 

 

Thanks to the financial derivates almost anyone is able to trade commodities. But it also means that it is not enough to “trust the commodity”, it is also necessary to have knowledge about how modern trading works and what risks it brings.

 What actually is a commodity? In simple words, they are products of equal quality and price that are produced by a large number of producers. That means that commodities are not mobile phones that are different in many characteristics. Commodities are divided into several groups: energy such as oil or natural gas; metals, but not only precious metal such as gold, silver, platinum or palladium, but also for example copper; agricultural products (various types of crops, cocoa, coffee, meat, cattle or even orange juice). Every commodity stock exchange where trading is happening have specified required parameters of selected commodities and the quantities that may be traded.

Given the characteristics of commodity stock exchanges where even the smallest price movements are watched closely, it is natural that leverage products – such as contracts for difference (“CFD”) – are used. When prices move, the money difference is paid based on this contract. In the case of price growth, the buyer pays money to the seller, in case of price decrease, money is paid in opposite direction. CFD are derivatives that enable speculations on price movement, without actually owning the underlaying asset – in this case the commodity.

We present you commodity trading using CFD and financial leverage using the following model case. Crude oil Brent had the value of 62.95 USD on 23 July 2019 at 6.45pm and then the value of 64.27 USD at 11.15pm. This represents a growth of 2.09 %.

In the table you may see examples of trades with leverage. Currently a leverage of 1:10 is applied when trading crude oil using CFD, our model in the table shows situations and profits/losses in cases, when leverage is lower or none at all. It is a speculation on price growth, which means we gain profits if the price grows and get losses if the price goes down.

 

A model case of how leverage trading with CFD works for oil trading
Brent 23 Jul 2019 6.45pm – 23 Jul 2019 11.15pm
Leverage	Value at the opening		Value at the closing		Change (in %)	Investment (EUR)		Profit / Loss (EUR)		Spread (EUR)
1:10	62.95		64.27		2.09	10,000.00		2,090		158
1:5	62.95		64.27		2.09	10,000.00		1,045		79
1:1	62.95		64.27		2.09	10,000.00		209		15.8

* Charges: the table shows so-called spread, that is a charge of the broker which is calculated from trader’s profit from the difference between buying and selling price. More information about charges and detailed calculations are available in https://goldenbrokers.net/.

 

The scenarios are valid for a trader that has opened his position on 23 July 2019 at 6.45pm while the value of oil was 62.95 USD and closed his position on the same day at 11.15pm at the value of 64.27 USD. In this time frame the Brent oil has grown by 2.09 %. The trader, as mentioned before, has speculated on growth. Without using any financial leverage his profits would be 209 EUR from an investment of 10,000 EUR. We can’t say this would be an unsuccessful trade, rather vice versa. If the trader speculated on price decrease, he would lose money. The speculation on growth was a good strategy in this case.

However, profits may be multiplied using financial leverage, for example in the ratio of 1:5. The trader would then reach a profit of 1,045 EUR from the same investment. When using leverage ratio 1:10, which is currently used for trading oil, the profit would be 2,090 EUR.

Capital markets regulation in the EU allows the maximum leverage level of 1:10 for commodity trading. In the same way in which leverage multiplies profits, it can also multiply losses. If the trader speculated on price decrease, he would end up with a loss of 2,090 EUR when using financial leverage of 1:10. That means he would lose almost one quarter of his investment during mere 4 hours.

As we showed you, it is a very risky product, which also means that no credible institution offers commodity trading with acceptable outcome from investment questionnaire. By law, all potential clients must fill it in before they can be offered such risky products.

 

Leverage trading has a long history

 

A first traded using financial leverage was a purchase of Pan-Atlantic Steamship Company by the company McLean Industries, Inc., in January 1955. Nowadays these trades are known as leveraged buyout. These buyouts were most popular in 1980s. CFD as know them now were introduced in London in 1990s. Brian Keelan and Jon Wood from the company UBS Warburg are usually named as founders of the instruments. CFD were frequently used by hedge funds and other institutional traders thanks to the possibility to trade without actual physical owning of the underlying asset. This way they avoided numerous high charges.

 

Towards the end of 1990s, thanks to the development of Internet and other means of communication, the possibility to trade CFD reached retail investors. Internet and other developments enabled watching every price movement and trade immediately. Many new online trading platforms and mobile applications were created subsequently and simplified trading even more. Thanks to easy access, capital markets trading has become a widespread matter.

 

 

 

Online trading platform users now have the professional stock traders’ tools at the hand’s reach, but often underestimate risks.

The online world enabled access of stock trading to broad public and it is no longer a privilege of selected groups of people. Nowadays we don’t have to go to a bank or search for a broker, in theory we don’t even have to consult what and how to trade and invest into. We don’t even have to own a powerful computer with lots of screens as we see in movies related to Wall Street investment bankers. We could get similar profits with a simple smartphone where we download trading application for free, for example Metatrader. We can be trading literally anywhere and anytime. And if we don’t trust our judgment, we may use so-called “social trading” which means setting our trading rules in a way that copies investments by a selected investor or a company.

We now show you leverage trading on an investment instrument called “contract for difference”, also known as CFD.

 

Leverage trading: high profits and high losses

 

As opposed to stocks or currencies, contracts for difference have been used in trading and investing only recently – since 1990s. At the beginning they served financial institutions to hedge against exchange rate movements of stocks and other assets. It was only later when they became a product traded by smaller investors and traders.

 

When using CFD instruments, the trader does not become an owner of a physical stock, which means he also does not have any rights to profit or voting rights. On the other hand, the trader does not have to pay any stock charges and CFD trading is faster and easier in comparison to traditional assets.

 

CFD are financial derivatives that are used for price movement speculations. In simple words, CFD is created by opening a position and is finished by closing a position. Traders may speculate on price decrease or growth. When closing a position, trader’s speculation is compared to the real price movement, which means a calculation of a profit or loss. This is then multiplied by financial leverage usage, that enables traders to add usually significantly higher amount of foreign capital to their own capital.

Trading with higher “amount” then leads to profit increase, but also to higher potential losses.

 

For a better understanding of how financial leverage in CFD trading works, we present you a simplified case. We will use Facebook stocks movements between 17 and 18 June 2019. Facebook stocks were valued at 185 USD (on 17 June, at the beginning of trading session). On the following day, the stocks were valued at 185.5 USD, which meant an increase by 1.89 %. In the table you can see examples of trades where leverage is used, from 1:1 ratio to 1:5 ratio. There are three different results according to the leverage level. A profit or loss is created based on the decision to speculate on growth or decrease.

We now present you a case where the trader expected Facebook stocks growth and speculated on it.

 

A model case of leverage trading with CFD stocks
	Facebook stocks (17 Jun 2019 – 18 Jun 2019)
Leverage	Value at the opening	Value at the closing	Change (%)	Investment (USD)		Profit/Loss	Spread* (USD)
1:1	185	188.5	1.89	10,000.00		189	2.45
1:2	185	188.5	1.89	10,000.00		378	4.9
1:5	185	188.5	1.89	10,000.00		946	12.25

 

*Charges: the table shows so-called spread, that is a charge of the broker which is calculated from trader’s profit from the difference between buying and selling price. More information about charges and detailed calculations are available in https://goldenbrokers.net/.

 

Let’s assume that the trader opened a position on 17 June at the beginning of a session with the volume of 10,000 USD, speculated on growth and then closed it on the following day in the evening. The market really went up. Without using leverage, the trader would earn a profit of 189 USD. If he used a leverage of 1:5, his profit would be 946 USD. On the other hand, he would have same amount of loss, if he had speculated on price decrease.

 

As you can see in the example, the leverage may help to higher profits, but it may also cause losses of the same height. That’s why it is necessary for the trader to realize, how high his risk affinity is. If the investor requires a low level of risk, stocks trading using CFD would not be his cup of tea. Market beginners are also not encouraged to use leverages. For investors with a positive attitude towards risk, this type of trading may be a welcomed member of the portfolio, although even experienced traders usually do not use higher leverage than 1:5. If the trader incorporates reasonable rules for risk management, a trading system with higher leverage may be created. More information and basic glossary may be found in https://goldenbrokers.net/.

 

 

Trading platforms users are able to use more and more tools that are used by stock trading professionals, but often underestimate the risks. Let’s go through such situations using a specific investment example.

 

Let’s use stocks indices that are usually long-term investments. How can they become a tool for short-term speculations where trading platforms users often underestimate risks?

 

Before Internet and mobile operator expansions there were times, when a regular person interested in investing did not have many choices when looking for information. The closest source was the local library or subscription to a magazine. Reports from financial institutions were often expensive and delayed, sometimes for several days.

 

With today’s infrastructure investors are able to read statements on the Internet, that are issued by various financial institutions, immediately after they are sent to the world. How-to manuals, information and contact data to reach respectable trade brokers may be found in minutes, as well as reviews and experiences of other users. Such amount of information, that general investors have, is unprecedented.

 

The offer of investment products and tools has expanded with information, too. Stocks indices are popular, hundreds of billions of US dollars are invested into them.

 

The attractivity and drawbacks of stocks indices when using so-called contracts for difference

 

Trading stocks indices may be leveled up by using an investment instrument called contract for difference (“CFD”) that works on a leverage effect principle. That means that investors add foreign capital to their own capital, which enables them to get bigger profits as well as higher losses. Leverage height is regulated by ESMA (European Securities and Markets Authority) for major indices, including those mentioned above, to 1:20, for minor stocks indices to 1:10 and for individual stocks to 1:5. By this definition, we may suppose that the regulator assessed the major stocks indices as the least risky out of all offered options, since they the highest leverage is allowed for use.

 

For a better understanding of how leverage in CFD trading works, we present you with a model case of a stock index. We will work with DAX Cash index movements. The value of this index was 12 062.50 on 18 June 2019 at 8.00am. On the same day at 4.00pm the value of this index was 12 342.70. This meant an increase of 2.32 %.

In the table you can see leverage levels of 1:1 up to 1:20. In this case we will be speculating on growth of the index, so if the index decreases, we will end with a loss. If the index grows, we will earn a profit.

 

 

Leverage	Value at the opening	Value at the closing	Change (%)	Investment (EUR)	Profit/Loss	Spread* (USD)
1:20	12,062.50	12,342.70	2.32	10,000.00	4,640.00	400.00
1:1	12,062.50	12,342.70	2.32	10,000.00	232.00	20.00
1:10	12,062.50	12,342.70	2.32	10,000.00	2,320.00	200.00

 

Charges: the table shows so-called spread, that is a charge of the broker which is calculated from trader’s profit from the difference between buying and selling price. More information about charges and detailed calculations are available in https://goldenbrokers.net/

 

Let’s assume that the trader opened a position at 8.00am and closed the position at 4.00pm. The index has grown by 2.32 % in this time frame. The speculation on growth has paid off. With increasing leverage, we can notice also increased profit, since not using leverage at all meant for the investor only a profit of 232 EUR from an investment of 10,000 EUR. When using leverage, this profit would be 2,320 EUR, and with the maximal allowed leverage height the profit would even be 4,640 EUR. That means a profit of 46.4 % in a single day.

The question remains, if this yield is able to offset the risk, which is high as well. In the other scenario, the leverage of 1:200 would produce a loss of the same amount of 4,640 EUR.

 

Is the risky trading suitable for you?

 

Such risky products require a strong discipline and trading experience. Trading of stocks indices through CFD is not suitable for traders, that try to avoid high risks and are rather happy with certainty. Traders that are willing to risk and are sufficiently experienced, may like such instruments more. CFD may bring high profits while using relatively small amounts of own capital. However, the threats of high losses are usually bound with the possibilities of high profits. This means that a reasonable strategy should be used when working with such instruments. And in each case, learning of all basic glossary in detail is necessary.

 

The affinity to risk is dependent on risk profiles in investment questionnaires. The questionnaire is a tool, that is implemented to protect both parties of the contract before entering an unsuitable business. Every broker is obliged by capital markets trading law to fill in the investment questionnaire with a potential client. The questions and answers then show and evaluate experiences and willingness to risk. The scale, where the potential client is set, then reaches from a very conservative profile, with requirements to have the highest certainty, up to aggressive types of investors that demand highest profits possible and are willing to undergo higher risks.