For a beginner forex currency trading may seem to be a whole new world but in fact the basics are quite easy to learn. You just need to understand the buzz words and trading terms and grasp a basic understanding of how the markets work.
Making big money in a short time is what forex currency trading is all about! It is possible for investors to make a lot of money very fast because the rates of exchange on the foreign market can rise and fall quickly. This means of course that it is risky and there is also a chance of losing a lot, just like most things in life that have the potential of big returns.
As you will know if you have ever exchanged currency for a vacation, the rates are constantly changing. For example you may change $100 into another currency planning to travel, and then find that you do not need it and change it back. The rate will probably have changed in the meantime and you may even have made a profit.
Forex traders deal in currencies hoping to make a profit all of the time, but instead of changing money at the bank they use a broker. Most transactions these days are handled online. In many ways it is not so different from stock trading. There is the same potential to trade in margins where a small balance held by your broker can control much larger deals.
One difference from stock exchange trading is that forex traders are not limited to dealing in their own country. You can trade any two currencies regardless of where you live. This also means that the market is international. Because of time zone differences, it is open 24 hours a day from Monday morning in Australia to Friday afternoon in New York.
Each currency is represented by 3 letters: USD for the US dollar, GBP for the British pound, EUR for the Euro, JPY for the Japanese Yen, CHF for the Swiss franc, CAD for the Canadian dollar, AUD for the Australian dollar etc. The exchange rate between two currencies may be expressed like this: USD/CHF 1.14. This means that to buy one US dollar you will need 1.14 Swiss francs.
If you want to start out in forex trading you will need to look for a broker or investment management company that you trust. It is worth shopping around and checking online forums for recommendations. Check out how long the company has been in business and what your rights and liabilities will be. Read all of the fine print.
You will probably also want to use a bot to do your trading for you. This is automated forex trading software that can trade 24 hours a day according to rules that you set for it. There is usually a demo option so that you can test out the whole system for a while before you let it trade with real money. There are many forex robots on the market and most of them come with full instructions for beginner forex currency trading.
The foreign exchange markets are situated all around the world. Currency trading is a global activity. Every country in the world uses money and needs to change that money into other currencies in order to trade or interact with other nations.
Currency exchange happens at every level of society. As an individual, you may have changed money when traveling on business or on vacaation. Or maybe you have sold something on eBay to somebody in another country. Their payment comes in to your account in their own currency, and the bank or other payment processor such as PayPal changes it for you. That is currency exchange at the root level.
Foreign exchange or forex trading has a different purpose, however. When you are trading on the foreign exchange markets you are not buying another currency because you need it. You are buying it in the hope that it will rise in value, so you can change it back and end up with more money than you started out with.
Of course, it is risky. The price movement could go against you and then you would end up with less money instead of more. So you will want to gather plenty of information about currency trading before you start.
Forex trading began in the 1970s when the major currencies were deregulated so that their values were no longer fixed. The banks and large investors quickly saw the potential for making money from the changing prices.
The main forex marketplaces are the big financial centers of the world. London sees the highest activity with New York second and Tokyo third. Other major players are Sydney, Zurich and Frankfurt.
Originally you had to be in one of those places to trade money, or at least have a telephone connection with a broker who was there. It was very difficult for somebody who was not on the spot to act fast enough to react to the sudden fluctuations in price that can happen in the forex markets.
But modern advances in technology have changed all of that. Since the rise of the internet it has been possible to trade on your own account from anywhere. This means that it has become easier and easier for the little guy to get a piece of the action.
While some people never think about foreign currency from one overseas trip to the next, others are studying charts and financial information or even using automated software in the form of forex robots to make money from the rising and falling prices with the aim of becoming financially free by trading on the foreign exchange markets.
Being a forex or foreign exchange trader no longer means you have to work for a bank in one of the world’s financial centers. These days you can trade on your own behalf, from anywhere.
Since the rise of the internet many people are doing this from their own homes, making money in their spare time or even making a full time income. But what is forex trading and how does it work?
A foreign exchange trader deals in currencies. He or she will sell one currency that seems to be falling in value, to buy another that seems to be rising. There are always two currencies involved in a trade (a currency pair) because when you want to buy dollars you have to have another currency to exchange for them.
In the beginning it is best to be involved with just one currency pair. Most people start out trading in the EUR/USD market, that is the euro against the US dollar. This is the biggest forex market. There is plenty of information available for this market and it tends to have lower costs and be relatively stable.
Nevertheless forex is a very volatile market. This means that the prices can rise and fall steeply and quickly. The risk is high. It is easy to lose money. In fact, some losses are inevitable, so you should manage your account so that you never risk too much on one trade. You can use stop losses so that your broker will automatically sell if the price goes a certain way against you. The aim is not to have no losses, but to make sure that your profits are higher than your losses so that you end up with a net gain.
You will need access to a computer with a high speed internet connection any time that you want to trade. Unless you use a robot to control your currency trading, you will also need time where you can concentrate on learning a profitable system and then on trading itself. You pretty much need to be able to lock yourself away in a room to do this, at least for a couple hours a day. It is no good trying to trade from your desk at your day job with your boss interrupting you, or using a computer in the family den with kids climbing on your knees wanting to play games. You must be fully concentrated on the movements in the market or you could miss the right moment to either open or close a trade.
If you are a cautious person who likes a solid investment with predictable low returns, you should not become a currency trader. Forex traders are people who enjoy risk and love the challenge of trying to turn a profit in a fast moving market.
It helps if you are strongly focused on your goals and not easily swayed by emotion. It is important not to let fears of losses or dreams of huge wealth divert you from your strategy. You also need to stay aware of financial news, not only in your own country but in all of the major world powers, because this will affect the forex markets. With these characteristics and a good trading system in place, a foreign exchange trader can reap substantial gains from his or her investment.
Forex Margin Trading: Make More Money With Less
Forex margin trading is a way of applying leverage to increase the purchasing power of your money. Leverage simply means using a small sum to control a much larger sum. This is possible because it is unlikely that the value of a currency will change by more than a certain percentage over a short time. So you can place a few hundred dollars in your brokerage account to trade on the margin – the amount that you think the price will fall. Your broker will in effect lend you the balance.
Trading on margins is also known in stock and futures trading, but because of the special nature of currencies, you can get a lot more leverage in the forex market. Depending on your broker’s terms, you may be able to control 50, 100 or even 200 times your account balance.
This can lead to big profits if you are successful, but it can also mean big losses if not. In general, the more leverage you use, the more risky your trading is.
We can understand leverage and margins if we consider an example.
Imagine that the current rate on the British pound to US dollar forex market is shown as GBP/USD 1.7100. So to buy one British pound you would need $1.71. If you expected the value of the dollar to rise against the pound you might decide to sell enough pounds to buy $100,000. If your broker used lots of $10,000 each, this would be 10 lots. Then you would sit back and wait for the price to go up.
A few days later you might find that the price had moved to GBP/USD 1.6600. Sure enough, the dollar has risen and the pound is now worth only $1.66. If you sell your dollars now and buy back into pounds, you will have made a profit of 2.9% less the spread. 2.9% of $100,000 is $2,900, so that would be an excellent trade.
But most of us do not have $100,000 spare cash that we want to trade on the currency exchange market. So here is where the principle of forex margins comes into play.
Since you are buying and selling different currencies at the same time, your own money only has to cover any loss that you might make if the dollar falls instead of rising. And you would put a stop loss into place to limit that loss, so $1,000 might be all you needed to have in your account to make this $100,000 purchase. Your broker guarantees the other $99,000.
In fact many brokers now operate limited risk amounts where the account will automatically close out the trade if whatever funds you have in your account are lost. This prevents margin calls which can be disastrous for a trader because they mean that you can lose more than you have. But with a forex limited risk account that is not a possibility. The broker’s software that you use to control your account will not let you lose more than your account balance.
Using leverage in this way is so common in currency trading that you will soon do it without even thinking about it.
The original title of this article was Fundamental vs. Technical analysis. This would have been a fallacy. Fundamental analysis is not in competition with technical analysis. They compliment each other. In order to be an effective trader on the Forex market a trader must consider both fundamental and technical principles.
Fundamental Analysis uses economic, political, and social circumstances. These forces affect the supply and demand.
There are 4 major forces that cause changes:
Unemployment
Increase=Lower prices
Decrease=Higher Prices
Gross Domestic Product (GDP)
Increase=Higher prices
Decrease=Lower Prices
Balance of Trade Deficit
Increase=Lower prices
Decrease=Higher Prices
Interest Rates
Increase=Higher Prices
Decrease=Lower Prices
Economists keep track of these forces using economic calendars. Economic calendars keep track of announcements and market moving events.
The Foreign Exchange Market is a currency trading market. It is open 24 hours a day, 5.5 days a week. This is possible because the market trades electronically.
There are 164 total currencies traded, but 8 major ones. These are the U.S. Dollar, Japanese Yen, Euro, British Pound, and Swiss Frank. The Australian Dollar, Canadian Dollar, and New Zealand Dollar are popular as well.
The leverage on the Forex market is much higher than the stock market. Some brokers offer upwards of 250:1. This gives the trader a greater chance to profit.
The probability of a major currency failing is very slim. A US dollar will fluctuate in value but never completely devalue the way a stock may.
The stock market consists of stocks of publicly held corporations. It is open 6.5 hours a day Monday through Friday. Approximately 8000 different stocks are traded.
In order to trade on the stock market an investor must have a broker. This broker acts as n intermediary(middleman) and executes the trades. They usually charge fees on top of a commission to make the trade.
There is no capital requirement to trade stocks per se. A trader must be able to afford the stock and the commissions to purchase it. If a trader wants to open a margin account $2500 is the minimum deposit. A margin account uses money loaned by the bank for trading.
This can be risky because stocks can fail suddenly before a trader can act. Their trade volume may decline rapidly and stagnate the stock. Remember what is borrowed must be paid back.
There are government restrictions on stop orders and short selling.
The most repeated word in Forex currency trading is pip. Pip stands for percentage in point. A pip is the smallest unit of currency.
Ex.
$0.1234
The pip is in the fourth decimal place on every currency except Japanese (¥)
¥0.12
Different currencies have different pip values.
Ex.
For the USD/JPY
90
For JPY the pip is .01
Pip Value/Exchange Rate
.01/90=.0001111For EUR/USD
1.5
For EUR use .0001
Pip Value/Exchange Rate
.0001/1.5=.00066
When a trade is completed the profit/loss is displayed in pip value. The pip value may be displayed as EUR instead of USD. A conversion will need to be done.
Ex.
Referring back to the EUR/USD example:EUR/USD=1.5
Pip Value= .00066
Pip Value times USD conversion
.00066*1.5=.000999 (Rounds to .0001)
On the Foreign Exchange Market currency is purchased in lots. A trader cannot use $1 to buy €1.5. A lot of €s is purchased. The typical lot is $100,000, some brokers offer as low as $10,000. A much larger profit is realized through these purchases.
Ex.
Calculating Forex profit.
EUR/USD=1.50 (€1=$1.5)
I have $100,000 I buy €66,666.
EUR/USD rises to 1.5020
This is an increase of 20 pips.
I sell my € to buy $
Pip Value
(.0001/1.502)*100,000=$15.02 per pip
Profit
15.02*20pips=$300.40
That’s only one trade!
Currency trading platforms are an important link between the individual trader and the currency exchange market. There are two types of trading platforms:
Client based platforms are downloaded onto the currency trader’s computer, while web based platforms operate using javascript on the brokers web page. The advantage of the web based currency trading platform is it can be used on any computer with internet access. The disadvantage is it is usually slower than the client based software.
There is no cookie cutter currency platform right for everybody. The trading platform usually come with a broker. When picking a currency trading broker a trader should ask himself these questions:
The internet is full of Forex platform reviews with the authors complaining of unscrupulous brokers. They deposit money in their brokerage account to find that the links to withdraw the money are dead, the fax number to send a written request has been disconnected, and there is no working telephone number on the website.
The best way to avoid this is to check to see if the broker is registered with the Futures Commission Merchant and overseen by the Commodity Futures Trading Commission. This is very important.
How effective is their currency trading platform?
Try out the currency platform provided by the currency broker. Is it simple to use accurate, and the charts readable? A currency trading platform that does not update the prices fast and accurately is completely useless.
Some brokers may offer great incentives to new arrivals, IF they deposit $10000. Others may be geared toward the beginner trader.
The main cost of trading with a broker is the spread. The spread is how most currency trading brokers make their money.
Ex.
Forexbroker charges a spread of 98.95/99.00 on ¥.
The trader uses $100 to by ¥9895.
Then immediately sells ¥9895 back for $95
The trade cost $5.
Spreads are calculated in pips.
The final charge to consider when choosing a Forex broker is the rollover charge. These are the charges that occur when a trade is postponed to the next trading day. They are based on the overnight interest rate of the country’s currencies being traded.
Foreign Exchange trading costs are kept low because of the size of the market.
Margin is stock equity placed as collateral on a loan given by the currency trading broker. This provides leverage for the investor to increase the profits made during trading. Some brokers offer up to 250:1 margins ( Every $1=$250). Margin trading may be required because of the currency buying requirements of the forex market.
Using margin trading is a great way to make huge profits, however if failed is a great way to accrue huge debts. A broker has the right to sell a margin investment to prevent further losses. If the investment plummets the broker may sell it and prevent any chance of recouping the loss.
Do not lose all your money! Before depositing real money into any Forex account an aspiring trader should demo trade for 3-6 months and develop a successful strategy.
The foreign exchange market (Forex) is used to convert currency from one country into the currency of another. It allows individuals and companies from different countries to easily sell products.
Every country has its own currency.
The common Forex Currencies are:
U.S. Dollar($)
Euro(€)
Australian Dollar(A$)
Swiss Frank(CHF)
Japanese Yen(¥)
If a business exports something to another country they use the Foreign Exchange Market to convert payment.
The currency prices on the Forex market fluctuate due local, global, and economic factors. This gives the individual forex trader the opportunity to make a profit using arbitrage. Arbitrage is the buying of a currency at a low price and selling it at a higher price.
Ex.
($)= US Dollars (¥)=Yen
$1=¥130I use $10,000 to buy ¥1,300,000
The value of the ¥ rises therefore it takes less ¥ to buy dollars.
$1=¥100
I use my ¥1,300,000 to buy $13,000 and make a profit of $3,000.
Foreign exchange rates are determined in two ways.
Foreign exchange rates are determined by the supply and demand of the money supply.
A country’s money supply is regulated by the government and its central bank. When the government wants to increase the money supply, it tells the central bank to print more money or lower the interest rates.
Ex.
The U.S. Government increased the nation’s money supply when they bailed out the failing US Banks in October of 2008. This caused the supply of the $ to increase, therefore lowering the demand and decreasing the price.
http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=airpxcdYO32M
A country’s money supply has little to do with short term Forex rate fluctuations.
When investors act on expectations of the price of a currency it causes a bandwagon effect. This causes the price of the currency to fall or rise in the short term.
Ex.
A major hedge fund manage states the US Dollar is undervalued. The price of the US dollar rises regardless of the statements truth because the individuals act on this managers advice.
There are two styles of analysis.
Fundamental Forex analysis uses the size of the money supply, interest rates, and inflation rates. It may also use a countries balance of payments (imports vs exports).
Technical analysis relies on analyzing past trends using price and volume data to predict future trends.
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