Basic Forex Pt. 1

Forex stands for Foreign Exchange. It is the most liquid market you can ever trade, and also the most accurate in price efficiency. Traders from all around  the world participate to trade the currency pairs (usually paired with US Dollars, Euros or Pound Sterling).

For example, the most popular pairs include Euro/USD (called the Euro), GBP/USD (Cable), and USD/JPY (Yen). Traders can choose to short or long the pairs, thus allowing traders to achieve a profit even when the market is up or down. Trading in the KLSE does not allow traders much flexibility as Forex does. 

Currency movements are influenced by a lot of factors, namely: Economic data and reports, Federal Reserve announcements, Major government meetings and summit, as well as disasters. Traders can choose to play this game in many ways, depending on their risk appetite. A well seasoned trader can leverage up his/her position and turn their small investment into big gains. They do so by scaling-up their positions. 

What is Scaling-Up positions?

Say the trader already has positions trading in the Euro. Assuming that the Euro suddenly rises, and the trader is "in-the-money", he decides to further increase his position by buying. He is thus using his "paper profit" to buy and hold on to his extra positions. As the Euro rises, he slowly scales up his holdings until he takes profit. By doing so, the trader can effectively increase the buying power of his capital. 

It is worth to note that if the position turns against the trader, he will experience major losses, and might even lose all of his capital, as his positions get margin calls.

Scaling Up and Margin Calls, Yen Pair

What is a Margin call?

Since it not practical for a small retailer (trader) to front say, USD100,000 to take a position in the Euro, the broker will fund the trader, by fronting the other USD99,000 for the trader to trade. Assume that the trader blows through USD1,000 in losses, then he will get a "Margin Call", often prompting the broker to close out the trader's positions. Gains and losses are calculated on the amount of movement of the currency being traded. The amount of movement or points, are called "Pips".

Pips

"Pips" are usually denominated in different values, depending on the type of Forex account being opened. In a micro account, per pip is usually at a minimum of USD0.10, while for a mini account it's USD1.00

Say you bought 2 lots of Euros. If the pair rises, and you made away with 50 pips, you essentially made a total of: 2 lots X 50 pips = 100 pips (USD10.00 in a micro account)
Not bad if you started out only with USD25.00 (minimum amount for most micro accounts).
A return of 40% !!!