Chapter 1 - Introduction to the Forex Market
Imagine that you bought a backpack for $ 10 per bag. Definitely, you have to sell it for more than $ 10 to make a profit, but how much profit will you make?
This depends on the profit margin, i.e. the difference between the selling price and the buying price.
If you decide to sell one bag at $ 15 per bag, and you have 1000 bags, you will get a profit of $ 5000, but what if you decide or have to sell the bags with a small profit margin of no more than $ 0.25?
Your profit will be on 1000 bags = $ 250 only, because the profit margin is very small.
If you want to get more profit with this narrow margin, you have to sell more bags.
If you sell 10000 bags with a profit of $ 0.25 per bag, your profit will be = $ 2,500, which is a good profit that you get in return for selling a large amount of bags to compensate for the narrow profit margin.
The same applies to currencies as well.
If its price change, this takes place in parts of a thousand (the point equals the fourth decimal place number, as we explained earlier). Most of the time, if you buy a small amount of a certain currency and sell it at a higher price in parts of a thousand, there is no doubt that you will not get a good profit.
In order to be able to get a good profit with these slight changes in currency rates, it is necessary to buy and sell huge amounts of currency.
Let's calculate it together to see the difference:
Suppose that the price of the Euro against the US Dollar now is EUR / USD = 1.1200,and you expect that the price of the Euro will rise to EUR / USD = 1.1201, i.e. one point.
Let's see how much you will gain from a one-point rise in the Euro price when you buy 1000 Euros.
When you buy 1000 Euros, you will pay $ 1120 for it, i.e. you will sell $ 1120.
Now, you have 1000 Euros.
If the price rises one point and becomes EUR / USD = 1.1201,
you will sell your Euros, you will sell 1000 Euros, and you will get $ 1120.10 for it at the new price.
Profit = Selling Price - Buying Price
= 1120.10 - 1120 = $ 0.1, i.e. 10 cents.
That is, the profit gained from the sale of 1000 Euros when its price rises one point is 10 cents.
If we assume that you sell the Euro at a price rise of 50 points, you would earn 5 US Dollars. (50 points * 0.10 per point).
It is a simple profit that is not worth it ... !!
However, what if you buy 100000 Euros instead of 1000 euros at the same previous prices?
You will buy 100000 Euros and pay $ 112,000 for it at the first price.
You now have 100000 Euros.
When you sell the Euros after the price rises by one point, we will get $ 112010.
Profit = Selling Price - Buying Price
= 112010 – 112000 = $10
That is, the profit resulting from the sale of 100000 Euros at one point price rise is $ 10.
If we assume that you sell the Euros at a price rise of 50 points, you will earn 500 US Dollars (50 points * $ 10 per point).
It is a good profit, is not it?
Thus, you see that when you sell or buy large amounts of currency, you can make a good profit, but if you trade in small amounts of the currency, you will not get a profit that is not worth the effort.
Likewise, you see from the previous two examples, that by buying 1000 Euros, you got 10 cents for each point.
When you bought 100,000 Euros, you got $ 10 for each point.
Therefore, the size of the amount in which you buy or sell the currency, i.e. the value of the lot or the size of the contract determines the point value.
Therefore, the lowest volume for trading in the currency market is 100000 from the base currency or close to this amount, depending on the company you are dealing with, because large amounts of currency are those that achieve good profits with minimal change in currency rates.
Thus, it is very important to know the point value for each currency that you trade with the company that will deal with.
You will not need to ask. The first thing that the brokerage company will tell you before dealing with it is the point value of each currency, and if it does not tell you, you must check that by yourself.
As we mentioned, the point value is calculated according to the size of the contract, i.e. according to the amount of the currency that you buy or sell, and the larger this amount is, the greater the point value is, as you noted in the previous examples when we bought a small amount equal to 1000 Euros and when we bought a large amount estimated at 100,000 Euros.
Because the contract size varies from one company to another, the point values of each currency differ from one company to another as well.
In spite of these differences, we have said that the contract size for the majority of the brokerage companies is now 100000 from the base currency, for standard accounts, so with such trading size how much will the point value be?
The point value for each lot will be close to:
The value of one point for Euros = $ 10.
The value of one point for the British Pound = $ 10
The value of one point for the Japanese Yen = $ 8
One point value of the Swiss Fanc = $ 6.
Although these values differ from one company to another, they are correct for most companies.
In e previous paragraph, e pointed out in passing that the size of a standard account lot is 100000 units of the base currency. We must now make it clear that brokerage firms offer a large number of accounts that serve small capital and thus provide “Mini” accounts in, which the lot equals 10000 units of the base currency, and “Micro” accounts where the lot size is 1000 units of the base currency.
Thus, the point value varies according to the size of each account, and we will show you a small comparison between the point value for “Standard” and “Mini” accounts.
You find that the point value for the Mini account equals (the Point value for the Standard account ÷ 10)
while the point value for the Micro account is (the Point value for the Mini account ÷ 10)
|Standard account||Mini account|
|Lot size||100000 units of the base currency||10000 units of the base currency|
|Used Margin Discounted Per Lot||$ 500||$ 50|
|The value of one point for the euro||$ 10||$ 1|
|The value of one point for the British Pound||$ 10||$ 1|
|The value of one point for the Yen||$ 0.8, i.e. 80 cents|
|The value of one point for the Swiss Franc||$ 0.65, i.e. 65 cents|