WHAT IS FOREX
Forex trading is all about exchanging currencies. In other words in this market you can trade one currency for another to make profits. Currencies in the Forex market are traded 24 hours a day 7 days a week. Foreign currencies are always traded in pairs - EUR/USD, GBP/USD, EUR/JPY etc. Around 70% of all transactions are made with major currencies like U.S. dollar, Australian Dollar, British Pound, Swiss Franc and Japanese Yen.
Global currencies not only fluctuate every minute, they also increase or decline in value against one another over long periods of time. Unlike the stock market, when one currency is going down, there is always a currency that is going up. This has made Forex attractive for banks and hedge funds, businesses and retail investors.
Up until 1998, the forex market was the hidden domain of the banks and the mega wealthy. Now the rest of us can profit from the largest market thanks to the brokers.
The internet has aided in making this market available as an unparallel opportunity for any body in the world. Individuals can now realistically trade in the same market as the bid players even from the comfort of their homes.
The Forex market established in 1971 was created when floating exchange rates began to materialize. The Forex market is not centralized, like currency futures or stock markets. Trading occurs over computers and telephones at thousands of locations worldwide.
BASIC FOREX TERMS
WHAT IS A PIP?
A pip is the last number to the right of a given currency. For instance, if the EUR/USD traded at 1.1442 this morning. The "2" is the pip. If it moved to 1.1486, that will be be a 24 pip moves. This is important because every pip equals a certain amount of dollars. If you trade with $10,000 each pip movement is equals to $1, if its with $50,000 a pip will be equals to $5, with $100,000 a pip is equals to $10, with $500,000 a pip will be equals to $50, with $1,000,000 a pip will be equals to $100 and so on. If for instance I trade with $1,000,000 worth of currency , one movement will be equals to $100. lets assume I bought at 1.1338 and sold at 1.1448. This will give me $10,000. (100*$100).
WHAT IS LEVERAGE?
The concept of leverage is simple, if for instance you have $10,000 dollars to trade with, your broker will let you borrow money from him so that you can trade in lager quantities.Some of the brokers can let you borrow as much as 400 (400:1) times the amount you put up in the trade. However, most brokers allow 50:1 and 100:1 margin. Therefore if you put up lets say $1,000 and your broker allows 100:1, you will be trading with $10,000. Please note: even though leverage magnifies your purchasing power and increases profits, it also increases risk and loss. Please do not take on high leverage if you are not sure of the trade. Leverages can make you super rich or super broke.
HOW TRADING CURRENCIES WORK.
When quoting currency pairs, the first currency is referred to as the base currency and the second, the counter or quote currency the base currency is always equal to 1 monetary unit of exchange for instance 1 dollar, 1 pound, 1 euro,. The dominant base currencies are in order of frequency, the EUR, GBP, USD. When a currency is quoted against the US dollar it is called a direct rate. Any currency not against the US dollar is referred to as a cross rate. Currency pairs are generally traded as 100,000 units of the base currency. For example, if you were buying EUR/USD at .97 you would be paying Dollars for Euros as follows.
100,000 x.97- $97,000 for 100,000 Euros
READING CURRENCY QUOTE.
Reading the currency quote.
Reading the foreign exchange quote is very easy to do. It’s really quite simple if you remember 2 things.
1. The first currency listed first is the base currency and
2. The value of the base currency is always 1.
EUR/USD – Quote.
The US dollar is the centerpiece of the forex market and is normally considered the base currency for the quotes. In the majors this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others quotes are expressed as a unit of $1
USD per the second currency quoted in the pair. For example the quote of USD/JPY 110.01 means that one U.S dollar is equal to 110.01 Japanese Yen.
When the U.S dollar is the base unit and a currency quote goes up. It means the dollar has appreciated in value and the currency has weakened. If the USD/JPY quotes previously mentioned increases to 113.01, the dollar is stronger because it will now buy more Yen than before.
The three exception to this rule are the British pound (GPD) , the Australian dollar (AUD) and the EURO (EUR) . In this case, you might see a quote such as GBP/USD 1.7366. Meaning that one British pound equals 1.7366 U.S dollars.
In these three currency pairs, where the U.S dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S dollars to equal one pound euro or Australian dollar.
In other words if a currency quote goes higher, that increase the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve U.S dollars are called cross currencies, but the premise is the same . for instance a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese Ten. When trading forex you will always see two sided quote consisting of a “bib and ask”.
The “bid” is the price at which you can trade the base currency at the same time buying the counter currency. While the “ask” is the price at which you can buy the base currency at the same time selling the counter currency.
Sell/Short and Buy/Long.
Note that as you start demo trading, you will be seeing terminologies like the one above. Always bear in mind that sell means “Shortt” while buy means “Long”-very important.
BASIC TRADING RULES
Trading in Forex can be very profitable; it could turn into a fortune overnight but could also be a disaster for the inexperienced. Plunging into Forex market without knowing its rules can be very costly .
There are two general principles of understanding which currencies to buy or sell. One is the technical analysis which focuses on price patterns using charting tools, the other is a fundamental analysis which focuses on price or currency values as a product of economic policies or political events. These fundamental analysis are key to identifying a great trade opening.
Take Control of Your Emotions.
The first rule is mastering your emotions. Do not be greedy , you must not make millions of dollars in every trade. This is why a lot of traders even the advanced ones get creamed. They stay in a good trade too long hoping to get all the money .suddenly the tide plummets against them and they get licked. This happens all the time.
You must not be too emotional about loses . Try and understand that even the best traders looses some times. Don't try to hang unto a loosing trade instead of exiting hopping there will be a market turn around. More often than not this results into pile of loses. The best practice is to decide where loses will be cut before even initiating a trade.
Don't try to take revenge on the trade. A lot of traders get creamed and they try to strike back. Trading when angry or vengeful will end up in disaster. If you get blasted , just take a break and reread the charts . Do some thing to distract yourself. Even if you think you have spotted a great trading opportunity ,take a break there will be trading tomorrow.
Set Stops and Limits.
A stop is placed so that you don't loose too much money . Assuming you bought EUR/USD at 1.1156 . You would start loosing money if it starts dropping . Therefore you might decide to place a stop at 1.1146 meaning if the currency drops to that level the system automatically exist the trade. Limits work the same way only for gains. If I set a limit on the same trade at 1.1166 . The system will automatically exit at that point whether I am still at the computer or not and I will make my gain. This is the best way to trade if you are not going to be watching the trade all the time.
GETTING STARTED IN FOREX
If you are new to Forex I recommend you get a lot of learning materials to practice trading before going real. Forex involves substantial risk you need to to get grounded with the techniques first.
Getting started is easy, to open position in the foreign market, all you need is a computer and an Internet connection and a program called Trading Platform. If you are really serious about making some money in Forex I suggest you start a live account with at least $500 deposit. However, you can start with a lot less than that but that might not get you far as you'll probably be making just a few dollars. Click below to learn and get started.
Please ensure that your internet connection is a fast one. This is because the Forex market is a fast moving market and you will need up-to-the second information to make informed trading decisions. I will advice against using a dial up connection, if you are serious about trading online a modern computer with a high speed internet connection cannot be compromised.
FOREX TRADING INVOLVES SUBSTANTIAL RISK OF LOSS.
