* average volume of $3 trillion traded each day
* largest and most attractive markets in the world
* trade foreign currencies on a global scale
Foreign Exchange Currency Trading (Forex) is the exchange of money between different countries. In a Forex transaction, traders concurrently buy one currency and sell another with the hope of making a profit when the value of the currencies changes in favor of the speculator as a result of events that takes place across the globe market.
Online Forex trading platforms is a nonstop cash market available 24-hours a day, five days a week. Forex Market is the largest and fastest financial market in the world industries with daily reported. It attracts people from any background, age and profession to trade. All you need is internet access, a valid credit card and with a minimum cash deposit.
Advantage to trade Forex
* High trading volumes
* Take profit in rising or falling market
* Very fast moving and exciting market with great potential for profit
* High leveraged trading with low margin requirement
* Extreme liquidity making it easy to trade most currencies
* Standard Forex instrument to control your risk exposure
* Its geographical dispersion
Trading Hours
Forex trades 24 hours everyday. Trading starts at 6:00pm EST Sunday through 4:00pm EST on Friday.
Currency Pairs
Currencies are quoted in pairs where one currency is expressed in terms of the other. For example, USD/DEM (US dollar against German mark) is a currency pair. The first currency is referred to as the base currency and the second as the counter or quote currency. The base currency is the "basis" for the buy or the sell. For example, if you BUY EUR/USD you have bought Euros (simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar.
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What is Bid , Ask , Buy & Sell
A bank or an authoried foreign exchange dealer will always provide two prices when asked for a quote. The first price is the one at which bank will buy a currency (known as the bid) and the second is the price at which bank will sell a currency (known as ask).
When you buy a currency, you are said to be "long" in that currency and when you sell a currency, you are said to be "short" in that currency. As the value of one currency rises or falls relative to another, traders decide to buy or sell currencies in order to make profits - since the objective is to earn a profit from their position. Placing a trade in the foreign exchange market is simple and the mechanics of a trade are virtually identical to those found in other markets. Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. To close out your position, you conduct an equal and opposite trade in the same currency pair.
Let see how Bid & Ask works for below example:
EUR/USD quoted at 1.2508 (bid) 1.2510 (ask), which means you can buy 1 euro (EUR100,000) at 1.2510 USD per euro.
The market moves in your favor - EUR/USD is now quoted at 1.2520 (bid) 1.2522 (ask)
Now you sell your euro and get the profit - You sell euro at a price of 1.2520
The profit is calculated as follows - Sell price-buy price x size of trade
(1.2520 minus 1.2510) multiplied by EUR 100,000 = USD 100 Profit
What is limit order
A limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. The trader specifies the price at which he wishes to buy/sell a certain currency pair and also specifies the duration that the order should remain active
What is stop order
A stop order is also an order placed to buy or sell at a certain price. The order contains the same two variables, price and duration. The main difference between a limit order and a stop order is that stop orders are usually used to limit loss potential on a transaction whilst limit orders are used to enter the market, add to a pre-existing position and profit taking.
What is PIP
A pip is the smallest denominator of a particular currency pair, so for the above example, if the EUR/USD moves from 1.2150 to 1.2155 then it has moved up 5 pips.
What is leverage
Leverage is a simple concept of Forex trading education. If you have $10,000 to trade with, your Forex broker will let you borrow money from him so that you can trade in larger quantities. They will let you borrow as much as 400 times (400:1) what you put up in a trade. Most brokers allow between 50:1 and 100:1 margin. So, if you put up $1,000, and your broker allows 100:1 margin, then you'll be trading $100,000 worth of currency (instead of $1,000).
That's important, because every pip equals a certain dollar amount. When you trade $10,000, each pip movement equals $1. The chart below shows how it goes from there. If you trade 10,000 worth of currency, each movement would be equal to $1. So if you bought at 1.1445 and sold at 1.1545, you would make 100 x $1, or $100. If you trade $100,000, each pip movement would equal $10 and so on.
Why does leveraged trading exist?
In the Forex market, leveraged trading exists to create the possibility of making a bigger profit. Leverage is necessary because Forex trades involve very small differences in price. The difference can be a very small part of one cent. With such small amounts, it can take a long time to make a meaningful profit, as well as bigger initial investments. Using leverage, you can get a return on your investment faster and using smaller initial deposits. Forex trades happen very quickly. When you are using leverage, you should be careful. The higher the leverage used the more chance you have of losing your investment when the currency pair is going opposite to your investment.
What is a ‘margin’?
A ‘margin’ is the amount you put into the Forex contract you open (the investment which you risk). Online trading brokers must make sure that traders can pay if they lose money when they trade. Traders put money into an account that can be used to cover any losses they make. This amount is also called ‘minimum security’. With a margin, traders are able to invest in markets where the smallest trade you can make is already high. Margin trading can increase profit, but it can also increase loss.
The profit and loss rates when you leverage your trade
As mentioned, your margin is your investment. Accordingly, you invest a margin of $1,000 for a contract of $100,000. This is a 1:100 rate. If the currency exchange rate moved, for example, 0.5% that would be a 50% change on your margin! Since the contract is 100 times the margin, then the change of 0.5% becomes 100 times bigger, to 50%.
SPREAD
The difference between stock markets and the Forex market brokers, is that in the Forex market, broker commissions are either very low or zero. So how do the ?? make money? They make it from the "spread" - difference between the actual price and the offered price through a broker.
If you bought the EUR/USD at 1.2158 as it is offered under the Offer column, and immediately sold it again before the price moved, you would only get 1.2155 as is shown in the Bid column. So the net result is -3 pips, or a loss to you, and a profit to the broker. Remember to always take the spread into account when placing a trade, setting targets and stop losses.
What is Roll-Over
Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.
What is support and resistance
Support is at the price level at which demand is strong enough to prevent the price from declining further. When buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, that demand will overcome supply and prevent the price from falling below support.
Resistance is at the price level at which selling is strong enough to prevent the price from rising further. When sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, that supply will overcome demand and prevent the price from rising above resistance.
What is the meaning of gap
A gap is a form when the price levels between the close of the market on one day and open the next day is different.
Types of gaps as follows :
A Full Gap Up occurs when the opening price is higher than yesterday's high price
A Full Gap Down occurs when the opening price is lower than yesterday's low
Line chart
A line chart draws a line from one closing price to the next closing price to see the general price movement of a currency pair over a period of time.
Bar chart
A bar chart is a vertical bar with bottom indicates the lowest traded price and the top of the bar indicates the highest price paid for that time period. A single vertical bar represent the currency pair’s trading range as a whole. Left side of the horizontal bar is the opening price, and the right side horizontal bar is the closing price.
Candlestick chart
Candlestick charts employ two-dimensional bodies to depict the open-to-close trading range and upper and lower stems (or shadows) to mark the day's high and low. It is used primarily to describe price movements of an equity over time.
How Risky is Forex Trading?
Losses are unlimited unless you have a 'Stop Loss' on your position. There is always a Stop Loss therefore you cannot lose more than your ‘margin’, the money you are prepared to risk and the rolling fee if it's a Day Trade transaction. However, Forex is risky so only risk what you can afford and is not vital to your well-being.
Volatility
Volatility (in Forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction.
On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
Commonly, the higher the volatility, the riskier the trading of the currency pair is.
Technically, the term “Volatility” most frequently refers to the standard deviation of the change in value of a financial instrument over a specific time period. It is often used to quantify (describe in numbers) the risk of the currency pair over that time period.
Volatility is typically expressed in yearly terms, and it may either be an absolute number ($0.3000) or a fraction of the initial value (8.2%).
In general, volatility refers to the degree of unpredictable change over time of a certain currency pair exchange rate. It reflects the degree of risk faced by someone with exposure to that currency pair.
Volatility for market players
Volatility is often viewed as a negative in that it represents uncertainty and risk. However, higher volatility usually makes Forex trading more attractive to the market players. The possibility for profiting in volatile markets is a major consideration for day traders, and is in contrast to the long term investors’ view of buy and hold.
Volatility does not imply direction. It just describes the level of fluctuations (moves) of an exchange rate. A currency pair that is more volatile is likely to increase or decrease in value more than one that is less volatile.
For example, a common “conservative” investment, like in savings account, has low volatility. It will not lose 30% in a year but neither will it profit 30%.
Volatility over time
Volatility of a currency pair changes over time. There are some periods when prices go up and down quickly (high volatility), while during other times they might not seem to move at all (low volatility).
What is risk capital?
Risk capital is the money that you do not need for day to day living and you can afford to lose.
Can I reduce risk?
You can reduce risk in many different ways.
First it is important to understand the market. Take up training programs. Deposit a small amount and do some small trades at first to help you understand how the market operates.
Another way to reduce risk is to try to judge what direction a currency might take by studying what has happened in the market until now and the causes of changes in the market. This is called forecasting. Forecasting helps you to develop an idea what might happen in the market in the near future.
You can also place Stop Loss and Take Profit limits on your trades. This reduces the risk of losing more than you feel comfortable with. Stop Loss and Take Profit help you to control your trading. When you place these limits on your trades, you do not have to watch the computer screen every minute.
How to make money trading in Forex
The profit potential comes from the fluctuations (changes) in the currency exchange market. You make money by buying a currency at a particular rate (or price) and selling it again for more than you bought it. The market is highly volatile which means it is constantly changing and therefore offers greater chances to profit but also greater risk. The incentive to trade in Forex is that regular daily fluctuations, say - around 1%, are multiplied by 100.
What is day trading?
Day trading is one way of performing foreign exchange trading. Usually day trading deals are opened and closed on the same day – you may make a few deals in a day, or a few hundred. It is your decision.
It is possible for a day trading deal to last longer than one day. When this happens, the deal is automatically renewed at 22:00 GMT each night until the deal closes. Upon renewal you will be charged a fee for rolling the deal for an extra 24 hours. This fee will be collected once a day when the deal is renewed. The fee will be collected form your Free Balance in your trading account, and if there is no sufficient free balance then your credit card will be debited. If there is no credit card, the next time you have a free balance and execute a withdrawal from your account, the amount owed due to non-payments of the rolling fee will be deducted from the amount you have withdrawn.
Day trading is becoming more popular now that more people use the Internet.
Technical analysis
Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.
Tools for Technical Analysis
Relative Strength Index (RSI): The RSI measures the ratio of up-moves to down-moves and normalizes the calculation so that the index is expressed in a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to be overbought (a situation in which prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).
Stochastic oscillator: This is used to indicate overbought/oversold conditions on a scale of 0-100%. The indicator is based on the observation that in a strong up trend, period closing prices tend to concentrate in the higher part of the period's range. Conversely, as prices fall in a strong down trend, closing prices tend to be near to the extreme low of the period range. Stochastic calculations produce two lines, %K and %D that are used to indicate overbought/oversold areas of a chart. Divergence between the stochastic lines and the price action of the underlying instrument gives a powerful trading signal.
Moving Average Convergence Divergence (MACD): This indicator involves plotting two momentum lines. The MACD line is the difference between two exponential moving averages and the signal or trigger line, which is an exponential moving average of the difference. If the MACD and trigger lines cross, then this is taken as a signal that a change in the trend is likely.
Trends refers to the direction of prices. Rising peaks and troughs constitute an up trend; falling peaks and troughs constitute a downtrend that determines the steepness of the current trend. The breaking of a trend line usually signals a trend reversal. Horizontal peaks and troughs characterize a trading range.
Is foreign exchange trading right for me?
Foreign exchange trading is not the right investment for everyone. If you are responsible and trade to the limits you set for yourself, you will find there are rewards. But you must take risks to get rewards. The risks must be right for you.
How to Start Trading Forex
Starting out trading forex is a very simple proposition: sign up with an online broker, download any software, deposit some money and you are ready to trade. Join now to explore your own market.
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