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Financial Education ♪♪♪ What is Forex? Let’s start with the basics! Forex is the abbreviation of Foreign Exchange and it is nothing more than the currency market. What does this mean? Suppose you want to buy food Where would you go? Well, to the food market, that’s where you can buy what you need. In the same way, if you need clothes you go to a clothing market. And the same with shoes or anything else you need. In this way we understand by market that place where you pay money in exchange for the good or service that you require. It is a trade in goods. Now, Forex is a money market. You pay money in exchange for money. Does it sound confusing? It is not so! Let me explain to you! Each country has a different coin or currency.

Some countries share the same currency but in general there are dozens of currencies in circulation. For example, Mexico has the Mexican pesos, The United States has the dollar, Peru has soles. Venezuela has bolivars, The countries of the European Union such as Spain, Italy, France, etc. have the euro, Chile has the Chilean pesos, and so on. And each of these currencies has a different value, so that in this money market you pay with the currency of one country to buy the currency of another country. It’s that simple! These coins have an international ISO code that consists of three alphabetic characters where usually the first two characters refer to the name of the country and the last to the name of the currency. For example, the Chilean peso code is CLP, where CL is for Chile and P for Peso, the United States dollar code is USD where US by United States and D by dollar, since the euro is a shared currency among all countries of the European Union the code is only an abbreviation of the name of the currency, therefore it is represented as EUR, the ISO code for the pound sterling is GBP, that is, Great Britain Pound, and so on.

When negotiating with currencies not only negotiate with one currency, there are always two, that is, you pay with one currency and you receive another. This is the reason why when you look at the Forex quotes you will always see the currencies quoted in pairs, because each transaction involves the purchase of one currency and the sale of another, so we have for example euro/dollar, pound/dollar, dollar/yen and these currency pairs are known as financial instruments. For each pair you will see a quote or price for the exchange rate, the first currency is known as the base currency and the second as the quoted currency, variable or counterparty. The exchange rate or price tells the buyer the amount of the quoted currency or variable that must be paid to obtain a unit of the base currency, that is, if you are trading the euro/dollar pair (EURUSD) and the quote is of 1 dollar 3125 cents, this is the price of one euro in US dollars. Therefore you must pay 1 dollar with 3125 cents to get 1 euro. Now, who buys foreign currency and why? This market was born with the objective of facilitating the monetary flow derived from international trade, that is, imports and exports.

For example, Venezuela produces oil and sells it to many countries in the world, mainly to the United States. Then, the United States pays Venezuela in US dollars and then Venezuela theoretically uses those dollars to buy bolivars and reinvest the capital in their country. In the same way happens with Chile, the main copper exporter in the world. Chile produces copper and sells it to China and other countries and transactions in foreign currencies also occur. So governments and private companies buy and sell coins from other countries to trade with them. International banks also buy and sell large amounts of foreign currency and finally people buy and sell foreign currency either because they are going to travel, for vacations, for business, and so on. So the main operators in the forex market are the following: Financial Institutions, Commercial Companies, Central Banks, Management Companies of Investment Funds and Private Investors through intermediaries, these are us, the common people.

Nowadays it can be assured with total veracity that the currency exchange market Forex or FX as it is also known, is the financial market with the greatest projection of growth in the modern financial world. Thanks to this market, specialized companies have emerged that are in charge of providing Forex account management services, investment funds and automatic systems. Currently there are specialized companies in the participation and support to the operators of this market that offer different types of services, these financial intermediaries are called brokers and they offer you the possibility of opening an account in a certain currency; dollars, euros, or your local currency so that through purchase and sale orders issued by different channels allow you to obtain benefits taking advantage of the fluctuations of the exchange rates of the different currencies. These companies given their importance in the financial system are usually subject to various controls and audits, however when you are talking about the financial intermediary or broker it is advisable that before choosing one you investigate very well its solidity and trajectory, as well as taking into account the legal framework by which they are governed.

In class number 4 I will talk more about this topic and I will show you in detail everything you need to review to choose a suitable broker, reliable, safe and in tune with your trading strategy. Not all brokers are good, not all are reliable, and even among the reliable ones, not all will be appropriate for your strategy or your trading style because there are conditions and characteristics that are not compatible with certain investment strategies. So it’s very important that you pay attention to this class number 4 before deciding on a broker and opening your account. I think I can not be emphatic enough at this point, do not open an account in any broker no matter how good and reliable it is before you have seen class number 4 of this course.

Trust me! You will thank me and your pocket too! Now, for you to have an idea of the size of the Forex market, the daily volume of transactions leads to moving around 3 trillion US dollars per day. Forex is the largest financial market in the world, it is bigger than all the stock markets of the United States together. Trillions of dollars are traded daily in the Forex market. From 1997 to the end of 2000, the daily volume of foreign exchange operations increased from 5 billion dollars to billion dollars. The Forex market continues to grow at an incredible rate. This high volume is advantageous from the investor’s point of view because transactions can be executed quickly at a low cost. Before the emergence of the internet only companies and very wealthy people could make foreign exchange investments in the Forex market through the banks’ private currency exchange systems because these systems required a minimum of 10 to 50 million dollars only to get started.

Today, thanks to advances in technology, an investor who owns only 1 dollar can open an account in a broker and access the Forex market 24 hours a day with just a computer, an Internet connection and all the information that You will receive throughout this course. This traffic activity with currencies is known as trading and the person who makes it is known as a trader, so this thing of being a trader is a profession, as well as being a doctor, accountant, pilot, engineer… although it is not the same as a job. Trading is an activity that you can carry out from anywhere in the world and in parallel to your employment or you can even be a full time trader and live on trading millions of people do it and believe me when I tell you that it is a profession highly lucrative, although I will not lie to you is also highly risky. However before continuing, I want to talk to you a little about the risk of investments.

Let me ask you this: How dangerous is it to drive a car? It depends on the driver, isn’t it? If a person who has never driven a car, who has never done a driving course, places it on the street behind a steering wheel, that person will be a very high risk both to himself and to other drivers and passers-by. However, the risk can be drastically reduced with study, practice and experience, right? The investments are exactly the same, the investment is not risky in itself, it is the investor who is risky because if he does not know what he is doing, the investment is not only a risk but terribly dangerous and is almost guaranteed to end with terrible consequences. Therefore, before investing you must study, practice, experiment and perfect your techniques, your knowledge and your skills… Thus, an investment will be as risky as the investor is, and as lucrative and profitable as the person who directs it.

Most have the idea that a job is safer than investing, it is not surprising that people think so. Almost all of these people have spent their entire lives studying and practicing to perform their work. A doctor studied at least 8 years of specialization, if he had not done it… would you trust your health in the hands of a doctor who has not graduated from university? A surgeon who has not studied enough is also risky, although he has a job, not only is it a risk to the health of his patients, it is also certain that he will run out of work in a short time. However, despite having studied and being a great professional, having a job is not exactly safe. The truth is that nothing guarantees that you do not wake up unemployed tomorrow, your income can be stopped at any time without you being able to do anything about it, either because the company went bankrupt, because you fought with your boss, because they replaced you with another resource or by the nephew of the boss… The list is very long! It does not seem so safe anymore, is it? If you have doubts that this job is not yours, tell me…

If you get tired of that job, can you sell it? When you die, can you inherit it to your children so they do not run out of food? It is not yours! It’s temporary! And you never know how long you’re going to have it! Can you say the same about the Mcdonald’s owner on the corner? That guy can sell the business, or inherit it. He is not going to be fired! He does not have to go every day to meet a schedule to guarantee his money and without doubt his income is much higher than average. Who is more secure? Let’s continue! Unlike other financial markets like the New York Stock Exchange, the Forex market does not have a physical location, everything is executed electronically within a network of banks without interruption 24 hours a day except on weekends.

Forex is what is known as a spot market, this means that everything is negotiated at the current price of the financial instrument. Financial instrument? Yes, remember, two currency pairs euro/dollar, dollar/yen, euro/pounds and… What are the currencies that can be negotiated? Actually, all legal tender currencies can be negotiated, however, the most commonly traded currencies are: the United States dollar also known as Buck, the euro also known as Fiber, the Japanese yen, the pound of Great Britain or Cable, the Swiss franc or Swissy, the Canadian dollar or Loonie, the Australian dollar or Aussie, and the New Zealand dollar or Kiwi, you will hear these nicknames frequently in the slang of the traders to refer to these coins. Now there are hundreds of currency pairs but I recommend that you only pay attention to the main currency pairs that are the most traded. It is considered that the activity of these currencies involves more than 85% of the volume of the daily market. In addition, the cost of transactions in foreign currencies is much higher because these currencies do not have as much liquidity as the main ones, and liquidity is essential in this market.

Also, they are more likely to fall into atypical conditions where opening and closing positions is not possible due to lack of counterparty, that is, you want to buy and there are no sellers, or you want to sell and there are no buyers. This graph that you have on the screen shows the world activity of currency exchange. The dollar is the most traded currency, participating in 87% of all transactions, the share of the euro is in second place with 33% while the Japanese yen has a 23% share. Now when you see the quotes of the different pairs of currencies you will see that there are two prices called Bid (Offer) and Ask (Demand). The large international banks provide the currency market with a purchase price Bid (Offer) and another sale Ask (Demand) The difference between these prices is called Spread and is usually constituted as the profit to the entity by its role as an intermediary between those who buy and those who sell using their channels. In general, the Spread in the most traded currencies is only 1 to 3 bips or basic points.

Do not worry, in the next class I will tell you in detail what a bip is, but for example if the purchase price or Bid in a euro/dollar quote is 1 dollar with 3100 cents while the asking price or Ask is set to 1 dollar with 3103 cents the three spread points can be clearly identified. I explain it better! Every commercial transaction has two parts, when you buy someone is selling you, isn’t it? So you are a party and your seller is the counterpart and that transaction takes place at a defined price, that price that for you is the price at which you are buying, the purchase price, from the point of view of your counterpart is the sale price because it is the price at which he is selling you. If you go to a store to buy $40 shoes, that price is what you are going to pay, and from the point of view of the trade it is the price that you will receive in exchange for the merchandise.

So, 40 dollars for you is the purchase price and for the merchant it is the sale price. However, in Forex, three parties are involved in each transaction. On one side are you who want to buy euros paying with dollars, and on the other side there may be a person like you who wants to sell euros receiving dollars in exchange but so that both of you, who do not know each other, can carry out this transaction you need an intermediary that is the broker. That broker provides them with the platform so they can buy and sell. So let’s suppose that the purchase price of the euro/dollar is 1 dollar with 3103 for the purchase and 1 dollar with 3100 for the sale, that is, you pay 1 dollar with 3103 cents to receive 1 euro in exchange, but that’s what the broker charges you.

Then that broker goes with your counterpart and buys the euro you need by paying him 1 dollar with 3100 cents. That is, the broker keeps 0.0003 cents as a kind of commission for having helped them make this transaction and that commission is what is called Spread. If you have not been very clear about this Spread, Bid and Ask… do not worry! All this, as well as other important concepts will be studied in detail in the next class so that you can master the terminology of trading like professionals.

I will go point by point explaining each word and its meaning. When can you Operate? Forex is unique in world markets, it is open 24 hours a day, you can operate at any time, from anywhere in the world, day or night … the forex market follows the sun and remains open always, except on weekends. However, the fact that it is open 24 hours does not mean that it is active all that time, that is, the prices go up and down and you can make money when it goes up and also when it goes down but you can not make money when the prices are not move or when they move very little. Therefore you need a high volume of transactions, that is, many people buying and selling so that the prices vary a lot. In fact, transaction volumes are higher when two or more markets are open at the same time. How is this? I’ll explain! The main trading centers are the London, New York and Tokyo exchanges. First open the Asian markets, they receive the sun first, then the Europeans and finally open the American markets. Taking the time of the East Coast of the United States as a reference, the market opens on Sunday afternoon, because while in the United States it is Sunday afternoon, in Tokyo it is already Monday morning.

So the market is open and you can start trading. And the closing occurs on Friday at 4 o’clock in the afternoon. Remember that we are talking about the schedule of the east coast of the United States which is the last to close. This allows permanent access to markets with the benefit of greater liquidity and a capacity to respond quickly to economic or political events that have an effect on them. The moments in which the main stock exchanges of the world open and the moments of the day when more than one market is open at the same time are those of greater liquidity and movement, that is, when the most radical price changes take place and it is the moment in which the most profits can be generated or the worst losses.

Let’s see a table where you can visualize the openings of the world markets. Again, we are talking about the time zone of the east coast of the United States. As you can see between each session there is a period of time in which two sessions are open at the same time from 3 to 4 in the morning the markets of Tokyo and London coincide and are open at the same time, and from 8 in the tomorrow until 12 noon the markets of London and the United States are open at the same time. Obviously, these are the most active hours in the market as there is a greater volume when two markets are open at the same time, with the London market producing the biggest changes but it is also true that there are certain days of the week where all markets tend to show more movement. And these days are: on Tuesdays and Wednesdays for the four main pairs of currencies which are euro/dollar, pound/dollar, dollar/franc and dollar/yen. The worst times to operate are on Fridays, Sundays, Holidays and when there are important news reports.

Fridays because they are unpredictable and there is usually little activity, Sundays and holidays because of the low volume and little movement, and finally operating during news is a guillotine because nobody knows where the price will go, the prices are unpredictable, there is little liquidity and great volatility . However, there are strategies that allow you to take advantage of these situations but you must know very well what you do and be a professional trader. Now, why would you want to trade in currencies? The benefits and advantages are many in Forex, these are just some reasons why so many people have chosen this market: There are no compensation rates, no exchange rates, no government fee no brokerage fees. Brokers are compensated for their services through the Spread or a variable commission according to the size of your investment. There is no intermediary! Forex eliminates intermediaries and allows you to negotiate directly with the market responsible for the pricing of any currency pair. There is no fixed lot! In the next class I will explain what a lot is but in Forex you determine how much money you want to invest, this allows you to participate with accounts as small as 1 dollar.

Low Transaction Costs. In retailing the Spread is normally less than 0.1% under normal market conditions. In the larger brokers the Spread could be as low as 0.07%. Of course, this will depend on your leverage and the type of broker, two aspects that I will also detail later. 24 hours Market As I mentioned, from Sunday afternoon until Friday afternoon the Forex market does not sleep and you can operate. This is great for those who want a business or part-time activity because they can choose if they want to do their trading in the morning, at noon or at night. Nobody can control the market! The currency market is so large and has so many participants that no entity, not even a central bank, can control the market price for a prolonged period of time. Leverage This is the biggest advantage and also the biggest danger of Forex because with very little money you can control a much larger amount. Leverage gives you the ability to make good profits while keeping venture capital to a minimum. For example, there are Forex brokers that offer a leverage of 200 to 1, which means that if you have 50 dollars in your account you can buy or sell up to 10 thousand dollars in currency value, similarly with 500 dollars you could negotiate 100 thousand dollars, and so on.

However leverage is a double-edged sword, this high degree of leverage can lead to large profits but without proper risk management it also gives large losses. High Liquidity Because the Forex market is so huge it is also very liquid, this means that you can always buy and sell at will instantly because there are always buyers and there are always sellers. Free demo accounts, news, graphics and analysis. Most Forex online brokers offer demo accounts for trading practices along with breaking news and graphics services. All free! These are very valuable resources for you to perfect your skills by playing with fictitious money before opening a real account, that you risk real money. The demo account will allow you to invest with toy money so you can make all the mistakes that are necessary while you learn. Investing in Forex is dangerous when you do not do it right. So the best part of your learning stage is that you can practice your techniques in a real scenario to perfect them and make sure they work without risking a single dollar out of your pocket.

So if you make a mistake, you will only have lost toy money. If you try to do that with real money, when you make a serious mistake you could be ruined, the only problem is that most demo accounts have a money limit, or a time limit. That is to say, they give you for example ten thousand dollars toy for you to practice and when you run out… you’ve run out! You can not keep practicing! Or they give you a demo account with an expiration time of 1 to 3 months, so when it expires you will not be able to continue practicing. But in class number 4 I will show you how to open an unlimited demo account in which you can deposit virtual money the amount you want and how many times you want without expiration, without conditions, without restrictions of any kind so you can practice with total freedom. And then in class 19, I will teach you how to use the platform with your demo account so that you can put into practice everything learned in previous classes and start investing in virtual money until you are sure of your success and can invest your real money feeling comfortable with what you do.

Mini and Micro Accounts Starting as a trader does not cost a ton of money, online Forex brokers offer Mini and Micro accounts some of them with a minimum deposit account of $10 or less. Now, I do not tell you that you should open an account with the minimum but Forex makes it much more accessible to the average individual who fears to risk initial capital. These are the tools you need to make Forex trading: A computer with an internet connection! And all the information of this course! How do you earn money in Forex? Your main objective as an investor is speculation about future changes in the price of currencies, and by buying and selling them according to fluctuations in exchange rates you can get profits or losses.

The purpose of trading is to exchange one currency for another with the expectation that the price will change. So the currency you bought increases its value in relation to the one you sold. But it is easier to see this in an example! Suppose you have seen the news and you have realized that the economy of the United States will weaken, perhaps you have seen that unemployment is growing or that a major company listed on the New York Stock Exchange went bankrupt, or maybe the United States has some complicated political situation… Any of these factors would weaken the US economy which is bad for the dollar. This means that the value of the dollar will decrease. At the same time you realize that the countries of the European Union are having a rebound in their economy, so it would be a good idea to buy euros with dollars, therefore you must execute a purchase operation of euro/dollar.

Suppose then that today the price of the euro against the dollar is 1 dollar 28 cents, then you buy ten thousand euros paying 12 thousand 800 dollars… Remember the leverage, you do not need $12,800 in your account. Two weeks later, the price of the euro has risen to 1 dollar and 35 cents. So, you change your 10.000 euros that by then they represent $13,500, obtaining in this way a profit of 700 dollars in the process. As I explained to you a while ago, currencies are quoted in pairs such as euro/dollar or dollar/yen because each transaction involves the purchase of one currency and the sale of another. For example, the exchange rate of the euro against the dollar looks like this EURUSD = 1.3100 It can also be seen in this way… EUR/USD = 1.3100 The currency on the left is the base… the euro And the one on the right is the currency traded. When you want to buy, the exchange rate tells you how much you have to pay in the quoted currency to get a unit of the base currency, that is, you pay 1 dollar and 31 cents to get one euro.

When you want to sell, the exchange rate tells you how many units of the quoted currency you get for the sale of a unit of the base currency, that is, using the example again, you will receive 1 dollar with 31 cents for each euro you sell. When you execute a euro/dollar purchase order it means that you are going to buy euros and at the same time sell dollars, and when you execute a euro/dollar sales order it means that you are going to sell euros and at the same time buy American dollars.

Are you going Long or Short? The first thing you should do is decide what you want to do, Do you want to buy? Do you want to sell? If you think that the euro will appreciate, that is, if you think that the value of the euro will increase with respect to the dollar… Then you must buy euro/dollar. And if you think it is the dollar that will gain value against the euro… Then you should sell euro/dollar. If you are buying it is because you expect the value of the euro to increase and then sell it at a higher price. and that means you’re taking a long position or going long. So in Forex, long equals buying, and as you will be imagining, going short is the same as selling. Get used to these terms because they are widely used in traders’ slang. You will often hear things like: “I’m long on the dollar/yen” or “I have a short position in the euro/pound”.

You should also know that everything that has to do with rising prices, upward trends, buyers, they are known as bulls, and this is due to the way of attacking the bull, which is from the bottom up. For that reason the symbol of Wall Street is the famous bronze bull of New York, located in Bowling Green Park, it is a symbol of optimism, aggressiveness and financial prosperity because it represents price rises. On the other hand, the downward movements, the bearish tendencies, the sellers, are known as Bears, and it also has to do with the bear’s attack, which is from top to bottom. Can I become a millionaire in Forex? And… Can I become a millionaire by investing in Forex? The quick answer to this question is yes. However, do not get confused. This is not a magic wand, nor is it the genius of the lamp. The foreign exchange market, like the stock markets, has the potential to make you earn a lot of money quickly but also to take away your capital in the blink of an eye. So you must be very careful! There are certainly thousands of success stories about people who have earned millions from capitals as low as $2,000 in a few hours, but you will also have heard those who have lost millions in the same period of time.

In fact, the statistic is that approximately 95% of people who invest in this market lose all their money in less than 6 months, and only 5% is profitable in the long term. These scandalous figures should scare you only if you are not willing to devote the time and effort required to learn things correctly, because the root problem, the reason why 95% of people who invest lose their money is due to lack of education. It’s like trying to fly a commercial plane without having even done a basic flight course, and most do that for the promise of getting rich in a stroke of luck, because they enter the market thinking this is a casino or a lottery…

Yes, it may be that you win a good amount of money from one day to another but if you do not know what you are doing, if your profit was the result of a stroke of luck, in the same way you won it you will surely to lose because you are not operating with your skills but throwing the dice, unless, of course, after winning you never return to operate in this market. But we know that no one does that either in the casino or in the financial markets. If you want to be profitable in the long term and make money systematically… You have to put your feet on the ground! Have realistic expectations! Define a goal of daily, weekly or monthly production. And make that goal consistent with your investment capital, with your trading system, with your risk management, with your personality and your trading psychology.

So stop dreaming of magical solutions and be professional with it. Forex is not a game and if you treat it as such, the toy will end up being you and your pocket will not thank you. Now you know what Forex is and what it is for, so I invite you to the next class where I will teach you some basic concepts so you can become familiar with the traders’ slang and begin to understand how it is spoken in Forex. Financial Education .

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