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.
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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