To anyone that is not a Wall Street professional, a stock broker, or international business magnate, the term Forex probably has almost no meaning. It might have been briefly addressed in a business article, or mentioned in the news, but Forex often falls below people’s perception. However, in successful business or investing, Forex can be a very important term. It refers to the Foreign Exchange Market, which is a worldwide trading market similar to the New York Stock Exchange. There are several differences to Forex that are very notable to any other stock service in the world.
What Is Forex Market ?
Unlike the most other stock markets, there is no centralized exchange for Forex. It has absolutely no base of operations. It doesn’t exist on the floor of a building. It has no corporate offices, and is the only stock trading operation that is available 24 hours a day. This is because Forex is highly specialized. While other stock exchanges trade in very narrow geographic locations and only cater to specific markets, Forex market operates in tandem with every other stock exchange in the world. Trading of Forex begins when the Australian Stock Exchange (ASX) opens on Monday morning. It then continues to be available for trading at every major stock exchange around the world. It closes on Friday afternoons when the New York Stock Exchange closes.
Even though Forex has no real home, it is the most traded market on the planet. That is because it does not use businesses stock or trade in the futures of corporations. Instead, the only thing traded is currencies.
All transactions are typically carried out via electronic networks. With the advent of sophisticated electronic trading platforms with automatic trading features such as take-profit order and stop-loss order, the popularity of forex trading has exploded in recent years; forex has become the most traded financial market in the world today with the daily average trading of almost $4 trillion, which is 40 times larger than the NASDAQ’s.
In the Forex Market, currencies are always traded in pairs and one currency is traded against another. Although there are a large number of currencies available for trading, most forex traders concentrate on currencies of major pairs, which are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD.
For example: American Dollars (USD) are sold to buy Japanese Yen (JPY) or British Pound (GBP) or Euros (EUR).
Throughout the course of a day, the value of different currencies changes as the markets of that country fluctuate. In much the same way as a traveler exchanges the currency of their country for the currency of another country. Forex does this all day, every day.
The major currency in the world is the Dollar of the United States. This is primarily because the United States is the largest consumer in the world, so changes in the US Dollar affect the buying power the United States has relative to the rest of the world. As such, drastic changes in the buying power of the dollar have massive consequences worldwide.
Click here to read more about Characteristics of Currencies .
What is Forex Trading and How does it Work ?
With no base of operations, Forex traders have the option of trading twenty-four hours a day, every single day of the work week. They can move with the market as soon as the market moves. The intent is to gain success and financial gain by predicting the alterations of currency cost.
One interesting aspect of the forex trading is that you can make money when the market moves up and you can also make money when the market moves down. The only time you don’t make money is when the market doesn’t move at all, but it is unlikely for the forex market to stay the same for any prolonged period of time. That means that there are always plenty of opportunities to make profits regardless of the current global and local economy conditions.
Some of this may seem a bit complicated at the start. Read it a few times. Sit down with a piece of paper and write out a few examples. It will make it easier to understand.
At it’s most basic, you buy a currency at one price and sell it at another. Obviously, if you can sell it for more than you bought it you have made a profit. Equally, "though it is amazing how many people think it is a one way street", if you can only sell it for less than you bought it you have made a loss. Another way to make a profit is to sell a currency and then buy it back at a lower price.
But how can you buy or sell something that you don’t own?
It’s easy with Forex. When you trade in Forex you aren’t actually buying anything. What?! That’s right. You aren’t really buying the currency, you are buying an “Option” in the currency. For example, if you “buy” dollars at $1.3505, you are only buying an option to purchase the dollars at that price at a future time. If the price of the dollars/option goes up you make money. If it goes up to $1,3705 then you can sell the dollars/option for two cents more than you agreed to buy the Dollars for.
The same works when you are selling. Now listen closely. When you sell a currency you are buying the right to sell a currency at a later time at a certain price. Thus, if you are trading in GBP/USD you are calculating how much you will have to pay in dollars to buy a £1. If you buy an option for £1 worth of dollars at $1,3505 and the price goes down to $1.3405, then you have to pay one cent less for every pound you need to buy. It doesn’t sound like much, but if you are agreed to sell £100,000 you have made a decent profit.
Don’t forget about the “Spread”: Your broker will not buy back the same currency for as much as he sold it to you for. This is his profit or “Spread”.
Happily for brokers, a spread will work both ways.Therefore you must factor this in, Whether you buy or sell you will need to take the spread into account before you turn a profit.
Example: Your broker may sell US Dollars at $1.3505 and buy them back at $1,3605. This means that before you can start to make a profit the price should gone up from $1.3505 to $1.3605.
How to Start Forex Trading ?
As traders, we all share one common goal, which is to make profits from trading, yet a vast majority of people hardly ever make consistent money as traders. This is because they don’t know what it really takes to become a consistently successful trader and they keep making same mistakes over and over.
The following are key points that can help you get started in the right direction:
- Learn the terminology.
Learn the trading platform well.
Practice on a demo account until you become profitable three months in a row.
Control your emotions: do not panic when the market goes against you. Trading with a fear of losing your money can cause you to make the exact errors you are trying to avoid.
Develop winning attitudes. Learn how to trade without fears.
Learn how to read and analyze price actions.
Go with a flow. Trade with a trend.
Avoid averaging like a plague!
Develop a winning trading strategy based on probabilities.
Take full responsibility for all your trading results.
Cut your losses early and let winning trades run.
Common pitfalls of novice traders:
- They want to jump right in and start trading before establishing winning attitudes.
They let fear and greed take control over their trading.
They are not willing to accept losses and hang on to a losing trade until the loss becomes too much to bear.
They expect the market to behave in their favor simply because some technical indicators say so.
They trade with poor or no money management.
They tend to overtrade with greedy expectations of making a lot of money in a short period of time.
Before you jump in and start trading, you must establish solid foundation: learn the terminology, learn your trading platform, practice with demo money, and develop a winning trading strategy.
A fear of losing can cause you to lose lots of money.
One thing you need to know about a demo account is that there is a huge psychological difference between trading on a demo account with demo money and trading live with your real money. A fear of losing your real money is one of the worst enemies in your trading.
A fear can cause you to make many errors that eventually cause you to lose lots of money. For this reason, do not ever trade with money you cannot afford to lose. When trading with money you cannot afford to lose, a fear of losing it can intensify drastically and, as a result, you will end up losing it. As long as you are trading with fears, you will never become a consistently successful winning trader.
Trading with a small amount of capital can significantly increase a chance to blow up your account. However, you don’t want to start out with a large amount of money when you are completely new to forex trading. A good compromise may be to open a micro account with a small initial deposit and trade micro lots, such as 0.01 lot. With a micro account, you are risking only 10 cents (USD) for each pip. Once you have learned to win successfully for three consecutive months, you can increase your account capital with a larger amount of deposit and start trading with either a mini account or standard account, depending on a size of your capital.
Typically, with a mini account, you are risking $1 USD for each pip. With a standard account, you are risking $10 USD per pip.
Importants things to know before start trading forex
It is important to understand how to read and analyze price actions. Understand the concept of a trend, support and resistance. Identify a major trend in higher time frame, such as Daily and 4-hour charts, and then zoom in to 1-hour or lower time frame to look for signals for entering a trade. It is important for you to be able to identify trendlines, support and resistance by looking at price actions on a chart.
Learn to read candlestick patterns so you will be able to identify reversal signals. Technical indicators are also good tools for confirmation of signals. However, do not trade solely based on technical indicators. All technical indicators generate “lagging” signals, which means that all their signals are after the fact. They are all based on the past history, and therefore, they do not predict future market movements. Combined with trendlines, support and resistance, price actions can provide much more reliable source of information than any technical indicators.
You don’t have to know everything about trading to start trading successful. The most important thing to do to become a consistently successful winning trader is to establish winning attitudes. Developing winning attitudes is far more important than trading strategies because without the winning attitudes, no matter what trading strategy you use, you will eventually lose.
Anything can happen in the market. Learn to accept the uncertainty and start trading in the now moment based on probabilities. Know that each trade is fresh regardless of the previous wins or losses. Accept uncertainty of the market without your own favorable expectations, such as “The market should behave this way or that way”. When you truly accept the uncertainty of the market, you will be able to trade without fears.
Remember also that the market always presents plenty of opportunities to make money. However, when you trade with fears, you will not be able to make yourself available to the opportunities.
Do not try to revenge trade. When revenge trading, you are emotionally upset over the previous losses you suffered, and it can lead to reckless and forced trading even when the market condition is not optimal to enter a trade. It is best to take some time away from trading to cool off. Go back to the trading next day or so when you feel refreshed and no longer upset. Remember also that if you get upset or emotionally disturbed by your losses, you are not truly accepting the uncertainty of the market. When you can truly accept the uncertainty, there is no reason for you to get upset when the market goes against you.
If you ever lose one-third of your initial account capital, stop trading. Go back to demo trading and figure out what went wrong.
Take full responsibility for all your trading results. There are so many traders out there who always want to blame on the market or brokers for their losses. The truth is, however, as long as they keep blaming others for their losses, they will never become consistently successful traders.
Developing winning attitudes does not come overnight. It may require you to unlearn some of your bad habits or resolve conflicting thoughts and beliefs that are preventing you from becoming a consistently successful trader. It may take quite some time for most people but be patient and be kind to yourself in the process. Once you have unlearned self-defeating thoughts and beliefs and replaced them with winning attitudes, you will become a consistently winning successful trader.