Foreign Exchange Trading|

Forex investing can be both fun, and profitable. The key to success though, is having a carefully though through plan, sticking to it, and executing it well. This is true for any trading style you might wish to follow. Having, or not having a plan will determine whether an investor will make or lose money on forex trades.

Simply put, a forex trading plan is a systematic approach to actually placing trades, based on all the analysis you have done on the forex markets. Any effective trading plan should, at the very least, consider three key questions.

Size of trades – Before placing any trades with a forex brokerage firm, investors need to determine how much they are going to stake. This will be influenced as much by a specific trading strategy as it will be by the confidence in the analysis leading to the trade. Needless to say, it is probably unwise to put the entire available capital into one trade.

When to enter a trade – Investors need to decide when exactly a trade will be placed, and at what price. Forex markets can be very volatile, with prices moving constantly. A trade that looked attractive at one price might be less so at another price.

When to exit a trade – Just as important as knowing when to enter into a trade, is deciding when to close the position. Two different figures actually need to be decided here. The first is the price to exit when a profit has been realised. Until the position is closed, any profits made are just theoretical. Just as important, investors need to have a stop-loss position. This price is determined by the amount of losses they are willing to take, if the market does not move in the way they anticipated.

These three facts should underpin any trading plan a forex investor might have. The detail for determining these three figures will differ from one investor to the next. The essence however, remains. Trading with no plan is like embarking on a journey with no idea where one is heading or how far one will travel. You will probably leave the house safely, but there are no guarantees that you will return in one piece.

Taking time to work out a plan, is just half of the equation. Just as important as having a plan, is sticking to it when trading. Tempting as it may be, forex investors should not ditch their plans when unexpected news comes along, or the markets move suddenly. Abandoning a trading plan midway through a trade is just as good as not having had a plan in the first place.

The reason for sticking to a plan in the face of changing conditions, is that a well developed and executed plan has taken this into consideration. Potential profits are determined before hand. So are potential losses. So, even when there is a sudden movement in the forex markets, the investor still has a clear idea of where he stands.

As the old adage reminds us, failing to plan, is planning to fail, even on the forex markets.

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).

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.

The concept used in a mini forex account is very similar to the platform used for a normal forex trading account. The change is the size of the account. A standard account is definitely larger in size as compared to a mini forex account. New investors can start a mini forex trading with a very minimal capital of 50$. It is definitely a very good and practical option for novices. You could always open your mini forex trading account online. The procedure has become simplified and there are many benefits of trading a mini forex account.

Some very simple and practical steps need to be followed for opening a mini forex account. First and foremost, you need to identify a brokerage firm which is ready to open the mini forex account. Personal details like name, age, address, email address, type of account etc need to be shared with them. Once you have completed the online form filling formalities, you would be able to open the mini account. Many agencies charge a nominal fee of $50 for opening the forex mini account. Due to the high leverage offered by the market, it is advised that you invest an amount of $ 2000 at least.

They are perfect for investors who are new to the industry. The mini accounts offer the flexibility of trading in small slots of money and also protecting oneself from any huge risks. The trader also develops confidence when dealing with a smaller trade size. The entire trading system is computerized and automated, and hence you could try your hands with different features of the forex market. It would also help you have a fair understanding and judge the market well.

The pip value of the mini trading account is 1$ for every pip. If you follow a closely controlled trading strategy, you would be able to do justice to the mini forex account. It also protects you from dealing under the influence of your emotions. When your emotions come in way, it could sometimes lead to erroneous decisions. You would also know when to enter and exit points, so that you make profits and lessen the burden of losses.

Mini forex trading helps you to still be in the market, without overleveraging your account. The software provided to the user is user friendly and it helps in easy interaction. There are many features which give live and latest changes in the market.

Forex trading takes place in currency pairs. A 1 pip movement in currency pairs like EUR/USD is equivalent to either a profit or loss of 1 dollar. The mini forex account offers the spread of 3 to 5 pips on forex currencies.