Foreign Exchange Trading|

When two currencies of different countries are exchanged one of them stands profited in the sense that, the amount of units increases while for the other currency the amount of units decreases. This profit and loss by mere exchange of currencies defines the concept of foreign exchange trading.

Currencies are expressed in short forms and they are always traded in pairs, for example, GBP/USD. From this pair you buy one currency selling the other. The base currency is the one which has more value. The currency with a lower value is called as quote currency or terms currency. When a pair of currency is quoted in forex following figures are mentioned in relation to the currency.

Rate of exchange of the currency will be mentioned. It is expressed with 4 decimal places, for example, EUR/USD = 1.2045.

Bid price or the price which the buyer offers to buy that particular pair of currency. It is the highest price offered for purchasing the currency.

Ask price or the sellers price is the price at which currency is offered for sale. It is the lowest price quoted for sale by the seller.

Bid and ask prices usually vary about 2 to 3 decimal places of the rate of exchange quoted. It can go beyond this range if the fluctuations are too steep. The units of difference between the bid and ask prices is termed as spread. The 1/1000th unit of the exchange rate between a pair of currency becomes a single pip.

You have to notice all these prices in a quotation to know how much the currency you bought or sold is fluctuating or is liable to fluctuate in future. These prices constantly keep on changing and monitoring them closely is the best way to know when is the right time to start and stop a transaction.

For short-term traders it is best to choose a single pair of currency and trade repeatedly in it rather than choosing multiple pairs. It helps them in finding out a technical pattern followed by the price movements. Currencies of richer economies dominate the market trade. They are higher in values and they are less prone to unexpected steep fluctuations. So it is best to trade in such currency pairs especially in short term transactions.

Forex is the only market where transactions are started and stopped within such a short time limit. The shortest deals in forex markets are executed within seconds. So the major factor in this market is not the duration for which you hold your asset. What matters is the timing at which you buy or sell a currency. The working of stock markets around the world has seemingly influenced forex currency rates to a certain limit. During most busy time zones prices tend to follow the trends which is popularly termed as “continuation”. After the market hours the prices tend to behave more unpredictably. This change in trends or reversals is also calculated by expert market players who try to make big profits during these times. Economical and political events also affect currency prices to a great extend.

Increasingly, investors are turning to the forex markets to try and deliver better returns than are possible on the stock or commodity markets. The forest market is huge, accounting for over $3 trillion in daily volumes. Improvements in technology, and in communications tools such as the internet has brought the opportunity to trade forex down to the retail investors. These improvements have also levelled the playing field with institutional investors. Evidence of this, is the tiny spreads found on the forex markets.

With this in mind, it is useful for the novice forex investor to pick the appropriate trading strategy to suit them. While there are similarities between stock market investing, and forex market trading, there are differences. This article will begin to break down those differences by highlighting the different types of trades that influence the forex markets, technical, fundamental, carry and arbitrage.

Technical traders make use of a range of indicators, all designed to show what a particular currency pair is expected to do. These indicators employed tend to be short term predictors. Most people will associate technical traders with the rigorous studies of currency charts. This view, while true in most cases, is rather simplistic. The number of indicators is wider, and more complex.

On the other end of the scale, are the fundamental traders. These traders tend to have trading horizons that are more long term. While less quantitative than the technical traders, the fundamental traders too have a huge arsenal of indicators they employ to arrive at their forecasts and trade. These can be as simple as weather patterns across the globe, or as arcane as the probability that a dictator will get overthrown. Forecasts on economic growth, global demand, and inflation are also used by fundamental forex traders.

Somewhere in the middle lies the carry traders. Carry traders are in effect interest rate speculators. They tend to be found trading in currency pairs that have a narrow historical trading band. The carry trader effectively borrows (sells) in one currency, and invests (buys) another currency whose economy is offering higher interest rates. Their gamble is that the higher interest in the second currency will more than offset any losses due to a movement in the currency prices. There are several methods for participating in the carry trade, including buying EFTs and trading directly using retail accounts.

The fourth, is the arbitrage traders. These traders attempt to discover tiny differences in currency pairs that trade in different markets. So if the GBP/USD pair is trading at 1.35 in one market and trading at 1.4 in another market, the arbitrage traders will buy it in the first market, and simultaneously sell it in the second. This trade is not limited to just two pairs. It can involve 3 or 4 currency pairs.

Arbitrage trade, while risk free, does then require huge computing resources to identify profit opportunities. It is therefore traditionally the preserve of banks with access to these vast computers. As you learn to trade on the forex markets, you would thus be best served by only looking at the first three trading strategies.

If you are considering getting into the foreign exchange market sometime soon, then one of the tools you will need if your are to make a success out of your forex trade is a good foreign exchange market trading strategy. Without an effective foreign exchange market trading strategy, your trade will be doomed to fail as you will sooner or later find yourself lacking a way to keep your trade focused – seeing that the nature of the forex trade is such that it is very easy for one to lose focus without even knowing it.

If on the other hand you have been dabbling in the forex trade for a number of weeks, months or even years without much success, and are beginning to wonder whether the success people claim to attain through the forex trade could be just false hype, then there is a good chance that lack of a cogent foreign exchange market trading strategy could be the core course behind the failure of your trade. You too, will need to develop an effective foreign exchange market trading strategy if you are to get yourself out of the rut you find yourself in.

There a number of inputs that go into the development of such an effective foreign exchange market trading strategy.

The first input that goes into the development of an effective foreign exchange market trading strategy is good forex education. Whether you choose to watch a forex video, attend a forex seminar, read a forex e-book or take a forex tutorial, you will definitely need to be well grounded in both the basics of forex trading as well as the more complex aspects of the trade – things like the fundamental analysis used to predict the price movements of the various currencies and the technical analysis used in the trade – among others. Without a good understanding of these things, you can never quite develop an effective foreign exchange market trading strategy. And neither can you quite benefit even from a ‘ready made’ forex market trading strategy, even if it were possible to get one. Luckily though, with media like forex trading videos, acquiring forex education need not be very involving, as some of us are quite allergic to the idea of having to read and assimilate ideas from a book.

The second input that goes into the development of an effective foreign exchange market trading strategy is intuition. Now in order to be able to develop intuition in things like the mechanics of the forex trade, you need to be very well grounded in how the things work (which is only possible through good forex education) and get so well grounded that you can start noticing even the most subtle of trends, so that you can be said to have developed intuition in forex trading.

The third input that goes into the development of an effective foreign exchange market trading strategy is experience. As it were, a theoretical strategy that has not been trading in a real foreign exchange trading situation is no strategy at all, because the theory of forex trade often turns out to be very different from the reality of (real-life) forex trade.

Major traders in forex are investment companies, banks, forex investment agencies etc. But lately, people belonging to different levels of financial background are entering the market. With the technical services offered by various investment companies and trading agents it has become easy for any novice trader to try his luck in forex.

Foreign exchange or forex trading is very lucrative and very risky too. Strategically planed approach and experience brings about sure success in any field and forex is no exception to this rule. Forex market is full of surprises and amazement. Thousands of dollars are made and lost within the flick of a moment. Fortunes are built within minutes. But if you choose to ignore the fundamental aspects of forex market and your sole interest is in multiplying your money then you might end up nowhere. You must have a natural appetite to master the behavior of market and its whole system of working. This is the real secret behind any successful trader. Most traders take their sale or purchase decisions under the influence of emotions. Never let psychological factors take the decisions for you. You have to believe in yourself and your intuitions while making your forecast for the day’s events. Never submit yourself to fear of loosing or greed of earning more. This will not yield you consistent success. Greed is something which lands up most of the traders in such a position from where they can never recover. With the dreams of making millions people have gone bankrupt. So the basic rule is never play too close unless you are sure about your deal or you don’t care losing the amount involved.

If you are a full time trader then you can invest time in learning the ways of forex market. Your first question should be how to avoid losses and not how to make profits. Once you learn how to get around the risk factor even under worse market situations then profits will automatically come your way. May be initially your profit for a week is equal to what your fellow investor makes in a day. By getting carried away don’t try to imitate him. Don’t let others take the decisions for you. You must develop your own trading style and keep going in your own pace.

If you are an individual investor you can start with day trading with lower ratio of leverage. You can simply restrict your losses by exercising stop or limit orders. If you are into fulltime trading you can indulge in several small transactions during the day. You can take assistance of online trading sites that will help you manage your trading account easily. Trading softwares are also available which indicates the price movements, and on the basis of price charts and other technical parameters it calculates weather the situation is favorable for you to enter a particular transaction and accordingly gives you signals. All this are just tools which aid you in trading. But as described earlier, to be a real trader you must know your trade well.