Foreign Exchange Trading|

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.

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.