Foreign Exchange Trading|

It is an incontestable fact that the playing field in the foreign exchange market trading has been increasingly getting leveled to allow more equity between the bigger and the smaller players in the field. A number of factors are seen to play a major role in this leveling of the foreign exchange market trading playing field.

Liberalization of the money markets in many countries is one of the factors that have played a major role in leveling the playing field in the foreign exchange market trading field. Even before the money markets were liberalized, of course, people were still conducting transactions in foreign currencies – and therefore buying and selling the foreign currencies. The only problem was that it was only a clique of people authorized by the government(s) who could trade in the foreign currencies and this was tricky for the smaller players as governments are prone to be influenced to favor the interests of big business at the expense of smaller players who might not have much resources to lobby to be allowed to trade in foreign currencies. With liberalization of the money markets, however, any person with an interest in trading in foreign currencies is free to do so and the bigger players have subsequently lost the legal advantage they always had over the smaller players and which they were often sure would effectively be a barrier to entry for the smaller players who couldn’t raise the resources required to lobby for and pay for the licenses that were then absolutely required to start trading in foreign currencies. Of course there are countries where restrictions still remain on who can and who can’t trade in foreign currencies – but these are typically not as stringent as they once were and it is in fact just a major of time before they are completely done away with.

The widespread development and availability of various foreign exchange market trading software is yet another factor that can be credited with leveling the playing field in the trade. What this software does is to (a large extend) remove the knowledge barrier to entry that faced many smaller players who made an intention to enter the foreign currency trading market. Indeed, through the use of this software, all a trade needs to concentrate upon are the basic profit and loss issues of the business while the software undertakes the more complex fundamental and technical analyses which would have been extremely difficult for anyone without a business background to hack. This software also made the business of foreign exchange trading much easier by automating many tasks that previously took too much of traders’ time – thereby leaving the traders to concentrate on the things which really matter in the trade – the profit and loss issues, what currencies to buy, what currencies to continue holding and what currencies to dispose off – and so on and so forth. Now in days gone by, the bigger players had the advantage that they could employ people to undertake the repetitive tasks now conveniently carried out with the software.

The modern approach to forex currency trading is different to the olden approach to the trade in a number of ways.

For one, the modern approach to forex currency trading sees the trade as a mass undertaking, a ‘free for all’ undertaking, as it were, which is in sharp contrast to the situation in the olden approach to forex currency trading when the trade was largely the preserve of the rich and the sophisticated. Many barriers that previously hindered the entry of smaller players into the forex trade have effectively been removed, examples of this being the knowledge barrier (which has been removed by easy availability of free or cheap forex education online), the legal barrier (which has been removed by the liberalization of foreign currency holding laws in many countries) – among others. The automation of the forex trade has also gone a long way in making the mechanics of forex trading easy enough for almost anyone to handle. Trading through on these automated forex trading platforms can get as easy as just clicking on a button here and typing in figure there – something anyone who knows how to use a computer can surely do. Now compare this with the situation in the classic approach to forex exchange where trading involved calling the people who might require forex currencies for their transactions, making friends with them, marketing yourself to them and then trying to sell (or buy) actual currencies – in the form of notes and coins – to them. The logistics of going to all these great lengths for the (seemingly) paltry margins that forex trade offers would have seemed like too much work for small scale traders, and in those days, only the big sharks who could leverage on huge volumes could somehow survive the trade.

Secondly, the modern approach to forex currency trading differs from the traditional approach to the trade in that it takes a global view of the trade, rather than a local view of the same as was previously the case. In the old days, a forex trader was largely limited to thinking in terms of buying forex currency and trading it vis a vis his country’s currency, but today’s trader might not even get to do anything with his country’s currency, unless of course that currency happens to be a lucrative one. The globalization of the forex currency trade has been achieved through the power of the Internet.

The Internet has actually opened up the global forex market to an extent that a forex trader operating from India can be trading in American and European currencies exclusively, to a level where such an Indian trader only gets to handle Indian rupees when reloading his account or when withdrawing profits from his account. This is a sharp contrast to what would have been the case a few years back, when such a forex trader would have been limited to just comparing the movements between the Indian rupee and the other currencies, as the forex trade was very much a ‘notes and coins’ and local affair then.

Most investors are very familiar with the workings of the stock market. They are quite simple. You identify a share whose price you think will rise. You then buy a quantity of these shares. When the price rises as expected, you sell these shares, and pocket the difference as a profit.

Forex markets are very similar. You buy a currency whose price you expect to rise, and you sell when you expect it to fall. This is the simple part. The key thing to remember with forex investments, is that each trade requires both a sale and a purchase. Forex investors therefore trade in currency pairs. The examples below explain this further.

In the stock market, you can go to a broker, and buy shares, in say Microsoft. Assume the price is £1 and you buy 100 shares, the trade will cost you £100. You have therefore exchanged £100 and received 100 Microsoft shares in exchange. The key thing to remember here is that the prices are quoted in £ per share.

A similar trade can occur in forex markets. The chief distinction is that by trading currencies, you are trading money, in exchange for money. Assume that the US$ and the £ are trading at 2:1, i.e. it will cost you $2 for every £1. If you expect the dollar to strengthen against the pound (i.e.. less dollars for each pound), you buy dollars, and sell pounds. In simple terms, you would buy $100, and in exchange, give (or sell) £50. When the dollar appreciates against the pound, you would then sell the $100, for (say) £60 in exchange, making £10 profit.

The distinction between the two, is that in a given market, stocks and shares are quoted and traded in a single currency. Therefore, any prices quoted are absolute. An increase in price is an increase in price.

In a forex markets, the prices are quoted in terms of other currencies. It is therefore possible for one currency to be strengthening against a second, while simultaneously weakening against a third. Therefore, currencies to do not rise in value in the absolute. They rise and fall in price relative to a second currency. The dollar does not just rise in value. It rises in value against another currency.

Extending the example above. The $/£ price might be 2:1. At the same time, the dollar/Euro price might be 1.5:1. As the forex markets operate, you might see the $/£ move to 1.9:1. In this instance the dollar has strengthened against the pound. Simultaneously, the dollar/Euro price might move to 1.6:1. This means that the dollar has weakened against the Euro at the same time that it has strengthened against the pound. The movements will also have implications for the pound/Euro price, but that is beyond the scope of this article.

If you had bought dollars, and sold (exchanged) pounds, you would have made a profit. If instead you had bought dollars and sold (exchanged) Euros, you would have made a loss.

This trading of currencies in pairs on the forex markets is their chief difference from the traditional stock markets. Thus, you will always find currency price quotations in pairs, e.g. USD/GBP (dollar/pound), USD/EUR (dollar/Euro), USD/JPY (dollar/yen).

In highly competitive business markets, it pays to always be well informed. This is more so in the world of forex currency (or forex) markets. Investors that have a good grasp of the market conditions, and the other plays will be at an advantage over their less informed counterparts. Many factors will affect the value of a currency pair in any give market. These include expected international trade, interest rates, as well as the general market volatility and trend. Being up to date with the latest research is therefore key to a successful trading strategy.

Knowing what to be on the look out for, and what areas to concentrate research on, is important if the research is to be fruitful. A lot of information is now available on the internet and in the many books published on forex trading. Any investor wanting to trade in the forex markets would be wise to spend time learning from them. Having said that, a lot of people find it easier to learn in a classroom environment than doing this research independently. This is where taking good forex trading courses is useful. At the very least, attending a training course leaves the investor with enough knowledge to further build on independently.

Different training courses will focus on different aspects of forex trading. Introductory ones will familiarise investors with market terminologies. Other focus on specific technologies employed in forex trading. Some will teach investors how to identify market movement trends, and so determine when to buy or sell.

Knowing a lot of this as a second nature is crucial to any successful forex trading strategy. Forex is traded in realtime, with markets and prices moving constantly. Being able to interpret the data, and formulate a trading strategy on the spot is a must. The forex markets leave little room for trading on emotion or worse, misinterpreted data. That is one guaranteed way for an investor to lose his capital.

At the very least, an investor needs to be intimately familiar with terms used in forex markets. Terms such as volatility, spread, stop orders, leverage and margin are in constant use. Other activity on the markets has even more exotic names which might sound like a totally alien language to the novice forex investor. Any good forex trading course should therefore begin with a teaching of these fundamentals.

Different technical analysis strategies on the markets use different tools and methods. A good course will familiarise any forex investor with the various strategies, as well as the correct (software) tools to use. It goes without saying that alongside teaching the right tools to use, a good forex trading course will also teach investors the best ways of using these tools.

The difference between amateurs and professionals, is that professionals recognise when they have made mistakes, and work toward eliminating them. Unless an investor can independently evaluate their actions, and find where they erred, they can never improve their trading strategy. This post trade evaluation should therefore be a cornerstone of any forex trading course.

Another important aspect of successful forex trading is money management. Foreign currency trading is of course, trading in money. Sometimes the difference between profits and losses a result of poor money managing strategies. It is not uncommon to see investors sitting on a pile of money that could have been earning interest for them. In some cases, the forex trades themselves break even, and the profit is made from earning higher interest in one currency than in another.

As noted earlier in the article foreign currency markets are rapidly moving, and decisions have to be made on the spot, frequently in the presence of little information. Investors should be able to spot when the trades they are making are based on whims and emotions, or are the result of careful analysis. Novice investors tend to get caught up in the excitement when markets move rapidly and forget the fundamentals, instead trading on their emotions, to their detriment. The better courses will teach investors that sometimes doing nothing is the best investment they can make.

While there is a lot of theory to absorb in order to successfully trade forex, nothing beats real life experience. The various courses all try and impart this experience in different ways. Some course will apprentice a novice investor with a seasoned trader, in real trading environments. Others take advantage of modern technologies, allowing investors to trade on live market data, using token money. Needless to say, irrespective of the specific methods, the best courses do ensure that investors get to apply their theory before they start trading with real money.