The simple sense of Forex (Foreign currency exchange, Foreign Exchange) is simultaneous purchase and sale of the currency or the exchange of one country’s currency for the one of another country. The world currencies do not have a fixed exchange rate and are always fluctuating, since each are traded in the currency pairs like Euro/Dollar, Dollar/Yen and others. 85% of daily trades are taken by major currencies trading.
So, what exactly is Forex Trading?
Investments usually deal with 4 major pairs: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to sign these pairs accordingly. These major pairs are considered as the Forex market’s “blue chips.� You will not receive any dividends on the currencies. Well known “buy low – sell high” gives the profit for currency trades.
In case you have a forecast that one currency would get higher to another, you can exchange the second one for the first one and wait for the profit. If you are lucky to see the trades following your forecast you can make an opposite transaction and to exchange currencies back gaining the profit.
Forex brokerage companies, also known as major banks dealers, carry out Forex transactions. Forex market is worldwide and your European colleagues may make a transaction with Japanese traders when it is time for you to sleep in the North America. There are 3 shifts for the major institutions to work in due to 24-hours a day activity of the Forex market. It’s possible to ask for overnight execution for take-profit and stop-loss orders of the client.
Prices in the Forex market fluctuate without any dramatic changes unlike stock market where considerable gaps are likely to be seen. There isn’t any problems entering and exit the market due to its daily turnover of about $1.2 trillion. Forex market can never be forced to stop. The transactions were carried out even in 2001, on September 11th.
Foreign exchange market (also called Forex of FX to shorten the name) is the oldest market in the world. It is also seen to be the largest one. Since currencies’ primary market work 24-hours a day, Forex is also the largest market with highest liquidity. This is an interbank market carrying out spot (or cash) transactions. The currency futures market, to be compared with Forex is traded only 1% as much.
Forex market does not have any exchange center unlike the stock market. Forex trading seem to go after the sun around the world, from banks of the United States to other parts of the world like Australia, New Zealand, the Far East or Europe and back to the US some time later.
High minimum amount of transaction and strict financial requirements used to make this interbank market unavailable for small speculators. The only dealers of currency markets were banks, huge-amount speculators, and largest currency dealers. They had an ultimate access to this market dealing with lots of primary exchange rates of the world currencies, the market with an extremely high liquidity along with an unusually strong nature of trends.
Nowadays small traders have an opportunity to purchase the small lots (units), because of the large inter-bank units being split by market maker brokers like FX Solutions, at the amount they like.
The traders of any size like small companies and individual speculators have an access to the market at the same price fluctuations and exchange rates, which only large players used to enjoy recently. Market makers monitor the rates so that produce their profit on the difference of rates at which the currency was bought and sold.
Foreign Exchange Market has an acronymic name Forex. It has the largest size and the liquidity throughout the world nowadays. Forex daily transactions are carried out at the common amount from 1 to 3 trillion dollars. No stock market is able to deal with a comparable amount of money.
This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time, it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.
This is certainly hypothetically because many newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase “be careful!” in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.
The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit, and less than 1% of traders make large fortune at Forex. You should not produce, sell, or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.
This market is a platform for banks, transnational corporations, and individual traders to change the currencies they possess into other ones. This is the spot Forex market. In this market, you can trade with up to 1:400 leverage. This means you will receive $400 (to your account) for each dollar invested. Therefore, you can trade with the $400,000 sum having invested $1,000 onto your account.
Still, there are lots of experienced traders who consider such leverage to be dangerous and will not proceed forward. Nevertheless, if you know how to use such high leverage, it will only do you good. However, this is the place to stop speaking about the basic things. Keep reading these articles if you want to be aware of how this market has occurred and some of its historical matters.
Now it is time to speak about the strategies and the way of making money at Forex some traders use. First, we should say that the things that work in one case do not certainly work in another. The fact is that currency trading surely means risk. Still, there are a number of strategies for the newbie to use to be the winner.
Forex trading may seem very easy but it is not. Your high today earnings may turn into considerable losses even of your starting capital tomorrow. Newbie traders are likely to make the same mistakes several times. Here is a list of such typical mistakes.
1. There is no use of searching the “Holy Grail”
This phrase is to think for those who are scared of losses or being too greedy does his best to get rich in no time. You can surely make lots of money some of the time and there isn’t a necessity of producing and advertising anything but a huge homework is required to learn first. You have to know how this market works and which factors can take the exchange rate up or down. You should also be aware of the effective management for your money not to lose everything.
The majority of traders starting at Forex, look for their ultimate strategy that will cause no losses and will bring only profit. The desire of such people is to make a strategy that guarantees stable profit and millions of earnings in a short time without any losses for them to quit and enjoy their fortune and the new huge house. This will never bring any success.
No strategy will give you only profit and such research is only waste of time. High profits of trading are caused by high risk, and you will not earn a fortune without being on the knife-edge. Do not be sure that every trade will close in advantage to you. You will always feel uncertain and there is no way to vanish it. It means that you should always be ready to the possibility of your strategy failing even if it is thought as perfect.
You will save a plenty of time and nerves by avoiding the search for the perfect strategy of earning millions. Even if you find this strategy, you will not ever need it. You will see why later.
2. Apply fundamental and technical analysis.
At the beginning of my trading, I relied only on the money management on which I wanted to base my strategy and saw no sense of these analyses. However, money management, which is still very important, does not worth omitting them. You can forecast the direction of the market basing on your technical and fundamental strategies to see their effectiveness.
You’ll be able to make forecasts of price movements by applying the past data of the prices and graphs to the technical analysis methods. You can predict future prices with the level of accuracy dependent on your technical analysis skills using the graphs of the rates you observe.
Trading with some brokers you can see technical indicators along with the graphs. You can apply it to your demo account and estimate your prediction skills necessary for planning trading decisions.
It is impossible to choose the most effective indicator among lots of various ones. Each trader has to decide for himself which indicator is best for him. You cannot find any magic formula; you just see the graphs, make your forecasts and find out whether they come true seeing the values in the news later.
Your decisions form this formula along with your knowledge that occurs out of the practical experience. Starting trading with an online broker it is best for you to trade with yourself on the sheet of paper rather than invest real money at once.
There are many technical analysis indicators available but here are the ones that are the most widespread: the Moving Average Convergence Divergence (MACD), the Bollinger Bands, Pivot Points, RSI, Stochastic, Fibonacci, EMA, and Elliot Waves.
The broker’s software will automatically make all the necessary calculations when you add the technical analysis indicator to the graph so that you will see some facts, which are unavailable without using these indicators. It is even possible for you to build your own technical systems basing on these indicators. Fundamental analysis is another tool that maximizes your profit and minimizes your losses on the trades. Some traders prefer only one kind, but the majority prefers both.
Fundamental analysis means trading following the news (e.g. telling about the economies or unemployment rate) in the countries of the currencies you trade. They can also tell about the events that can have a strong influence on the currencies’ exchange rate.
You can make forecasts on the market direction by following the news as well. That is why various trading software of the brokers like www.oanda.com offer a link to the page containing important news.
3. Use the strategies of money management.
Money management strategies let you win or lose. You should use them to be in a profit. Many traders make too vast investments in every trade and this is not always rational and reminds of a saying: “Expect to make too much and you will make too little, expect to make little and you will make a lot.” It means that even if you invest much trying to get a lot on every trade you can lose all and even if you make small investments looking for a small reward you can make a lot in some period.
1% of the total sum of your account is the maximum sum of the potential risk. This is the first rule of the money management. Stop loss and limit orders may help you to follow this rule. This may be the reason of the small profit, especially if you have small initial investments. However, by compounding a part of your profit or the entire amount, you can get an exponentially growing income.
This strategy of compound profits is the one that helped to make millions on financial market instead of gambling that results in losing all investments quickly.
Here is the example of the opposite tactics that many traders follow. Imagine that you have an initial investment of $5,000. You are lucky to possess the trading account and you enter a $1,000 trade. In case the market trends down and you lose your $1,000, then your assets become $4,000. Keep following your strategy and enter a $1,500 trade. Just make sure the market is at its low and remain hopeful that you get your $1,000 back on top of an earned extra $500. Then the market keeps moving against you leaving you with $2,500 on your account, which is only one-half of your starting capital. This is a very difficult situation to recover from.