Foreign Exchange Trading|

It is difficult to put into words the fast paced excitement that lies ahead for would be forex traders. Globally, the forex markets account for over $3 trillion in daily volume. While trading in forex was once the preserve of the super-wealthy and the banks, it is increasingly becoming popular with the average investor.

Advances in technology, and in particular, the internet, mean that individuals can trade on forex markets from the comfort of their homes. Technology aside, successful trading in forex still requires some knowledge on the part of the investors. The forex markets to the novice will appear different, totally alien and with a totally different language. Some people are too intimidated to even begin down the road to becoming successful forex traders and investors.

Despite these fears, the knowledge can be acquired readily, and easily for anyone willing to take the plunge. A few ways of going about it exist, and are suited to forex traders with different levels of experience.

Internet – The internet has an whole plethora of articles on forex trading. This is particularly so for total novices. Articles are available totally free of charge, on every forex trading topic imaginable. The diligent researcher can find information on everything from the history of the forex markets to the most complicated rocket-science-black-box forex trading models. Again, the price of most of this is FREE, so there really is no excuse for not doing a bit of research.

Books – In the past the books you found on forex markets seemed aimed at people with mathematics degrees. Full of theories and equations. There was actually little practical information to be found in these books. Because banks were the only institutions trading in forex, it was assumed that you learned the mechanics on the job, once you were working for one.

Now, the increase in the number of small investors in the forex markets has seen a similar increase in the number of books aimed at individuals. More than just wax lyrical about the theory, these books now provide valuable and practical tips on the forex markets. Everything from evaluating and choosing investment strategies, to more advanced material is covered. As the topic has become more popular, increasing numbers of libraries are stocking these books, so you do not even have to buy them.

Forex trading courses – Along with the articles and books, there are a lot of courses on forex markets and trading now available for the average investor. Prices range from FREE to six figures. There is something in there for everyone. The advent of sites such as youtube means that in some cases, even video material from other courses is available to anyone with a computer and an internet connection. Those who prefer structured learning, and having their hands held all the way should head for these.

Demo accounts – Last, but by no means least, is the increasing numbers of forex brokerage firms offering demo accounts. Forex demo accounts allow investors the ability to use real systems, trading on real forex market data in realtime, without risking any money. So, having familiarised oneself with the theory, this is the best way of actually getting some trading experience under your belt, risk free. Getting one of these accounts is as easy as applying online via a firm’s website, and in most cases, the accounts are free.

Clearly, as the above shows, there is a wide variety of sources for learning how to trade in forex markets, with a lot of it being available totally free of charge. Log on, explore and learn, and start trading forex profitably.

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.

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.