Forex for Beginners

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Forex for Beginners

WHAT IS A PARITY?

As it is known, forex market allows online investments and offers a lot of investment product options.

Investment products on forex markets are primarily foreign exchange rates, commodities and stock exchange indices.

Foreign exchange rates are available as foreign currency pairs which are called parities.

Parity is the exchange value between two different currencies. For instance, trading TRY for USD in a currency exchange has the same meaning as opening a long position on the USDTRY parity.

All foreign exchange rates are available as pairs, and you can trade by opening long or short position for the foreign currency you plan to buy at the relevant parity. This allows a trader to trade faster with more options without visiting a currency exchange at all.There are two types of parities on the forex market: major and exotic.

For instance;

USD/TRY and EUR/TRY are minor parities that are usually preferred by Turkish traders. They have a lower transaction volume compared to major parities, therefore exotic parities have wider spreads.

There are six major parities.

“ EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD” . Currencies other than those 6 major currencies are called exotic minor currencies. Exotic parities are usually preferred by local traders.

Trading on the forex market with parities is both faster and less costly than physical trading. In this sense, parities are frequently used as an investment product by forex investors worldwide.

Currencies of the Major Parities represent active and developed economies. Moreover, international traders usually trade on major parities, effectively increasing their transaction volumes.


WHAT IS A LOT?
The word "Lot" denotes "dividing, allotting, distributing by ballot".
In the forex market, 1 lot is a magnitude that stands for 100,000 units. Size of a transaction on a forex market is expressed in lots, and your transaction is entered in lots. For instance, 1 lot of a parity represents 100,000 pieces of the unit on the left side of the foreign exchange rate.

EXAMPLE
Assuming that the average spot price of the EURUSD parity is 1.1200, if a trader who thinks that the EURUSD parity will increase wants to buy 1 lot, they sell 1.1200*100,000 = $112,000 and buy a transaction magnitude of €100,000. This means that the purchased currency is 1 lot, i.e. 100,000 units of EUR.

Please note that the transaction magnitude of €100,000 is not the actual amount but the transaction magnitude bought in for profit or loss with a certain amount of guarantee and the leverage preferred.

LOT TYPES
Traders may prefer smaller transactions than 1 lot on the forex market. The most frequently used lot types in forex are mini lot and micro lot.

Mini Lot
A Mini Lot means 0.1 lot, i.e. 10,000 units. For instance, assuming that the EURUSD parity is 1.1200, a purchase transaction volume of 0.1 lots means a transaction magnitude 10,000*1.1200 = $11,200.

Micro Lot
A micro lot means 0.01 lot, i.e. 1000 units. For instance, assuming that the EURUSD parity is 1.1200, a purchase transaction volume of 0.01 lots means a transaction magnitude 1000*1.1200 = $1120.

CALCULATING GUARANTEE IN FOREX TRANSACTIONS
A minimum balance, i.e. a sufficient amount of guarantee should be available in your account to trade on the forex market. The required amount of guarantee is directly affected by your leverage ratio, transaction volume (lot) and the market value of the product you trade in at the time of the transaction.

HOW GUARANTEE IS AFFECTED BY LEVERAGE RATIO
One of the biggest advantages of trading in the forex market is the leverage system. The leverage ratio you use in your transactions directly affects the amount of guarantee that must be available in your account. Your lot amount and raising the leverage ratio with the parity unchanged allow you to invest in the same transaction volume with a smaller amount of guarantee.

For instance;
Let's say that you want to buy 1 lot in the EURUSD parity and you set your leverage ratio to 1:100.

The amount of guarantee you are required to deposit is calculated as follows:

Guarantee = (Market Price of the Parity * Transaction Volume * Lot) / Leverage Ratio

Guarantee = (1.1200*100,000*1) / 100 = $1,120

If you set your leverage ratio to 1:10 rather than 1:100, your guarantee would be as follows:

Guarantee = (1.1200*100,000*1) / 10 = $11,200

As the leverage ratio increases, your investments bear more risk, and as long as your lot amount remains the same, the minimum guarantee amount falls.

HOW DOES LOT SIZE AFFECT THE AMOUNT OF GUARANTEE?
Increasing your lot with the leverage ratio and the price of the foreign currency to be invested in remaining the same requires more guarantee. Reducing your lot means that a smaller amount of guarantee is enough to start trading.

For instance;
Assuming that the leverage ratio is 1:100 and the price is 1.1200, the amount of guarantee required to buy 1 lot in EURUSD is as follows:

Guarantee = (1.1200*100,000*1) / 100 = $1,120, and the amount of guarantee required for a smaller lot of 0.1 is as follows:

Guarantee = (1.1200*100,000*0.1) / 100 = $112

WHAT IS SPREAD?
Spread is the price difference between the buying and selling rates of a foreign currency. A forex trader does not buy or sell a foreign currency at a single rate. There is a buying rate and a selling rate for a given foreign currency. No commission fee is required for forex transactions. Only the transaction cost called spread is paid. Spread is the transaction cost that is the difference between the selling rate and buying rate of a foreign currency at the transaction time.

For example, let's assume that the EUR/USD parity buying rate is 1.0593 and selling rate is 1.0591. The spread ratio of the EUR/USD parity for the specified rate is 2 pips.

In other words, it costs 2 pips on the FX market to perform a transaction for 1 lot on the EUR/USD parity.

Since spread is the difference between the buying and selling rates of the traded parity in the forex market, spread depends on the product traded. When we start a transaction in the forex market, we start with a loss equal to the spread. This resembles the buying-selling rate difference of a currency exchange.

The spread ratio depends on the liquidity of the relevant product and the volatility of the forex market. In case of shortage of liquidity, the gap between the buying and selling rates may widen and the spread ratio may increase.Warning Spread ratios may be highly volatile before, during and after the data, and the market opening hour of the relevant product.

"Dynamic Spread" is used as a standard in the forex market. Spread ratios in the interbank market change dynamically based on the transaction volume in the market. However, some brokers use fixed spread for specific products.

Spread is expressed in "pip".

What Is a Swap?
The word sense of "Swap" is "to exchange". In financial markets, it denotes an exchange contract under which two parties mutually exchange different interest payments or foreign currencies based on an asset or a liability within a certain period of time.

In forex transactions, the money bought is lent, and the money sold is borrowed. Swap fees are calculated by the relationship between low interest and high interest depending on the foreign currency traded.

In the forex market, swap can be defined as "overnight interest cost" or "cost of carry".

If the currency with the higher interest is sold and the one with the lower interest is bought, the overnight cost of carry of the one with the lower interest rate is accepted, and it is reflected to the investor's account as the cost of the swap.

For instance;
Since a trader with a USDTRY buying (long) position sold TRY and bought USD, a currency with a lower interest rate), the transaction will result in a minus (-) cost of swap for the trader.

What Is a Pip Point?
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WHAT ARE PIP & POINT?
As it is known, forex market is less costly than many financial markets. It is very easy and fast to trade in the forex market without incurring account such costs as maintenance fees, brokerage fees, commission fees, etc.

While trading in the forex market, the only cost element to consider is the "spread ratio". Spread denotes the difference between the buying and selling rates of a foreign currency, commodity or index. Spread is expressed in "Pip". In short, the fourth decimal place of the magnitude showing momentary changes in foreign exchange rates is called "Pip", and the fifth decimal place of the same value is called "Point".

Abbreviation of the "Price Interest Point", pip is often defined as the smallest change in foreign exchange rates, and spread ratios representing the transaction cost in forex markets is expressed in pip. 1 pip of change stands for the change in the fourth decimal place of a currency.

EXAMPLE
Rise of the EURUSD parity from 1.3450 to 1.3453 is a 3-pip increase

1.3453 - 1.3450 = 0.0003. As can be seen here, the fourth decimal place of a rise or fall in a foreign exchange rate gives the pip value. Based on the amount of lot and the leverage ratio, this value may change in monetary terms.

To calculate the monetary value of 1 pip:

Let's assume that the EURUSD parity is 1.3453 and we trade 1 lot using a 1:100 leverage.

100,000*0.0001 = $10 is the monetary value of the EURUSD parity in an upward or downward change of the pip value.

WHAT IS A POINT?
As a unit that indicates the change in the forex market, point resembles pip. However, the fifth decimal place of a foreign exchange rate is used to calculate the point. The point value is usually 0.1 times the pip value.

For example, an increase from 1.34528 to 1.34572 is a 44-point or 4.4-pip increase.


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