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An introduction to the basics of Forex Trading - YouTube
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hello and welcome to ZuluTrade this
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video will introduce you to the basics
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of forex trading in order to start
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understanding how forex trading works we
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will be explaining to you the most
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important terms that you will need to
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know and will be using on a daily basis
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when trading forex but first let's see
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what forex stands for forex or foreign
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exchange trading is the activity where
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you can bet if one currency will get
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stronger or weaker relative to another
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currency for example right at this
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moment with 1 euro we can buy 1.39 US
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dollars this exchange rate can change at
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any second it is the banks which are
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continuously adjusting to the rhythms of
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supply and demand that are responsible
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for this exchange fluctuation so let's
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make a bet let's bet that the euro will
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become stronger than the US dollar in
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this case we buy a euro US dollar pair
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remember when we believe that one
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currency will rise against another we
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buy the strong currency and we saw the
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weak one since in most cases the sale of
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the currency will be handled by an
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outside brokerage firm all we have to do
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is buy the euro US dollar pair another
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way to say this is that we will go long
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on the euro US dollar pair so when we go
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long on the euro US dollar pair we bet
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that the euro will rise against the US
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dollar or if we go long on the US dollar
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euro pair then we believe that the US
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dollar will become stronger than the
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euro if we believe that the euro will
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become weaker against the dollar we can
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also sell the Euro against the dollar
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another way of saying this is that we
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will short the euro US dollar pair so
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when we short the euro US dollar pair we
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are betting that the Euro will become
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weaker than the US dollar so let's
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consider a real-life example right this
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second with 1 euro I can buy 1.39 for 0
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US dollars if I go long on the euro US
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dollar pair then I bet that the Euro
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will go up against the US dollar now
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let's watch what happens
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1.39 for 0
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one point three nine four one one point
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three nine four to one point three nine
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four three one point three nine four
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four up until one point three nine four
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seven great we were right now with one
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euro I can buy one point three nine four
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seven US dollars let's quit betting and
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take our profit now to figure out how
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much we just made we first need to check
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how many euros we bet so let's say for
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this bet I risked 10,000 euros before I
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placed my bet five minutes ago 10,000
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euros would have bought me thirteen
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thousand nine hundred and forty US
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dollars but after my bet was finalized
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ten thousand euros bought me 13 thousand
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nine hundred and forty seven US dollars
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in just five minutes I made a profit of
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seven dollars as the euro gained 7 pips
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against the dollar
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what's a pip good question one pip
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represents 1/100 of a percent or point
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zero zero zero 1 which is the smallest
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amount of currency fluctuation used by
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forex and it is the unit used to express
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the price change of an exchange rate the
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brokerage firms want to help you make
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larger bets without you having to
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deposit the full amount of the bet to
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understand how leverage works let's
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assume that you believe that the euro
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will become much stronger against the
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dollar you are so sure about this that
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you would even bet a hundred thousand
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euros but you can't afford it no problem
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the brokerage firms will let you take
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this risk and lend you the hundred
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thousand euros all they need from you is
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only one thousand euros as a collateral
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deposit from the brokerage firms you can
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borrow a hundred two hundred or even
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four hundred times the amount of your
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initial collateral deposit if you risk
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1,000 euros from your own money you can
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place a bet between a thousand and four
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hundred thousand euros it's up to you if
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your cash in pocket is one thousand
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euros and your bet is one thousand euros
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then you don't exercise a leverage or
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you can say that you exercise a leverage
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ratio of 1/2
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one in case you want to bet 50,000 euros
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with only 1000 euros then you exercise a
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leverage of fifty to one now the big
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question is do the brokerage firms lend
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the money for free no they don't they
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charge you according to the current
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interest rates but we will examine this
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issue later in a different section a lot
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is an industry term used to describe the
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size of a bet a 1000 euro bet is a micro
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lot a 10,000 euro bet is what we call a
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mini lot a 100,000 euro bet is what we
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called a standard lot so for example if
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we go long on a mini lot of euro US
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dollar that means we are betting an
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amount of 10,000 euros remember the
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actual deposit that we need to make for
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this mini lot could be from 1 to 400
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times smaller depending on how much
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money we decide to borrow from our
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brokerage firm why do the exchange rates
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move so fast as you probably know if you
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have euros parked in your local bank
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account for one year your bank will
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credit your account with a certain
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percentage of interest however what you
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may not know is that interest rates vary
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among different currencies for instance
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the interest rate on your annual deposit
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in euros in a bank in Paris might be
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3.5% whereas your friend in Britain
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might be earning 5.5 percent interest on
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his deposit in pounds in London in order
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to take advantage of the higher interest
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rates of the British Pound you would
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probably sell your euros and buy British
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pounds however you would probably not be
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the only one many individual investors
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and banks could do the same and if
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enough euros are traded for the pounds
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the euro will become weaker and the
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pound stronger as decreased demand for
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the euro drives its price down another
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reason why exchange rates move so fast
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may result from multi-billion dollar
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companies who need to convert the
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currency of large amounts of money for
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example let's say Toyota the car
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manufacturer sold 1 million cars to the
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United States Toyota has been paid from
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the u.s. importer
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20 billion US dollars which gets
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deposited in a US dollar denominated
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account in Japan it's April and it's tax
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season for the Japanese residents Toyota
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has to pay 1 trillion Japanese yen in
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taxes this year that's close to 10
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billion US dollars this is a large
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amount even for Toyota in order to pay
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the Japanese government Toyota will have
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to convert the 10 billion u.s. dollars
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to Japanese yen so Toyota goes into the
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forex market and sells US Dollars and
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buys Japanese yen the demand for US
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dollars at this moment will naturally go
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down since 10 billion US dollars are
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being sold all at once
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similarly the demand for Japanese yen
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goes up because somebody wants to buy
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one trillion Japanese yen in this case
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the exchange rate between the euro and
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the Japanese yen could easily be
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affected a last example relates to the
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timing and circulation of market
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information for instance let's say a
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financial report is published and shows
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instability in Europe the unemployment
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rate has been going up lately and
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companies are beginning to report
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negative growth this news will scare
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many banks prompting them to sell the
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euro and the euro will decline against
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other currencies as a result an
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important point to remember is this
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typically the stronger the image of a
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country or a group of countries that
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represent a currency the stronger that
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currency becomes against others in the
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long run
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