Posts Tagged ‘currency trading’
This article on foreign exchange basics will look at the forex market. There is a lot to learn about the foreign exchange market and you will need to understand how it works if you plan to take practical steps towards becoming a successful forex trader.
You will come across several different terms for the forex market. Forex and fx are both short ways of saying ‘foreign exchange’. It may also be called the currency market, the foreign currency market, the currency trading market, etc. All of these terms refer to the same international market on which the currencies of the world are exchanged and traded.
The forex market is not situated in one particular place. Practically every country is involved so there is a possibility of trading currencies in most countries. Because of this, the market runs 24 hours a day, five days a week. The week starts on Monday morning in Sydney, Australia (that is, 5 pm Sunday EST in the USA) and ends at 4 pm EST on Friday in New York. During that time it is always possible to trade currencies somewhere in the world.
The forex market is a surprisingly recent phenomenon. Up until the 1970s, currencies had been stable relative to one another since the second world war. What was called the ‘gold standard’ gave every currency a value in relation to the US dollar. This system was introduced in order to maintain a stable world economy.
However, in the early 70s the USA abandoned the gold standard and the values of the different currencies began to change. Banks immediately began to exchange currencies for profit, buying low and selling high, instead of only making exchanges when they needed to transfer money from one country to another. In effect, each currency became a tradeable commodity. This was the beginning of forex trading.
The value of a currency is, in a sense, the value of the nation whose currency it is, so just like companies on the stock exchange, if a nation is successful the value of its currency increases and if it is going though a crisis the value drops. These fluctuations can be great and can happen very fast. The sums involved can be huge too. The total value of transactions on the forex market now averages almost $2 trillion dollars a day.
The market is still dominated by international and investment banks, major corporations and other large financial institutions. However, it is possible to trade as a private individual through a broker and with the rise of the internet this has become much more popular. There are now a large number of people involved in forex trading through their home computers, although because they trade much smaller amounts than the institutions, they only account for around 2% of the total forex market.
The most common exchanges involve the US dollar against other currencies (especially the euro, British pound, Japanese yen, Swiss franc and Australian dollar) but it is possible to trade any one currency against another. Many of the automated forex robots used by individual traders concentrate on lesser pairs such as the pound against the euro.
The foreign exchange market is huge and an individual trader can feel like a tiny ant dodging around the feet of elephants. But almost anyone can get into it if they have a little capital that they are willing to risk. Some brokers will let you start with as little as $250. Before investing any real money, however, it is best to practice with a forex demo account while you learn the foreign exchange basics.
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What is currency trading? Well, at its simplest it is exchanging one currency for another, just as you might do when going on vacation to another country. You sell your currency for the money of the place you are going to.
However, when people talk about forex (foreign exchange) trading or currency trading on the forex market, they generally mean something very different. In this case traders are constantly exchanging one currency for another (buying currencies and selling others) with the aim of making a profit when the exchange rates change.
It is a little like trading in stocks on the stock market. Stock traders usually buy and sell stocks very quickly compared with the average personal investor who will take the advice of a broker but often keep stocks for years or even decades.
How Does Currency Trading Work?
The best way to demonstrate how currency trading makes money for the traders is to use an example.
Let’s say the current rate on the British pound to euro forex market is this: GBP/EUR 1.1200. That means that to buy one British pound you will need 1.12 euros. If you believed that the value of the euro was going to rise compared to the value of the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let’s say a few days later, the exchange rate has moved to: GBP/EUR 1.0600. Sure enough, the pound is now worth only 1.06 euros. Now if you sell your euros and buy back 100,000 pounds, you will have made a profit of 6% on your cash, less any fees.
This sound like a lot of money. Who has 100,000 pounds or even dollars lying around in the bank to trade with? Not me, and I guess not you either. But fortunately, you do not have to have all that money for real. You are buying and selling at the same time, so all you need to have is enough to cover any loss that might be made before you could exit the market if your prediction was wrong and the currency that you bought started to fall. Your broker loans you the rest.
This is called trading margins. On a $100,000 trade the margin is usually 1% or 2%, i.e. $1,000 or $2,000. This is the money that you must have in your forex brokerage account.
The amount you trade is determined by ‘lots’. A lot may be worth $10,000 or more depending on the currency and the Forex broker. So if you want to trade $20,000 you would trade 2 lots and so on.
There are now limited risk accounts, where you can only risk the amount of cash you have on account with the broker, thus avoiding margin calls. This is done by allowing smaller players to trade forex using ‘mini lots’ or fractions of a lot. So you can trade $1,000 by trading 0.10 of a lot. This reduces risk but may cost more to trade.
More and more ordinary people are getting into Forex trading these days. It has certain advantages over the stock market and even if you know nothing about valuation of the different currencies you can set up a forex trading robot, a complex software program that will trade for you according to the settings you choose. Keep in mind that it is a risky business and money can be lost as well as gained. Knowing what is currency trading gives you an idea of whether you want to take the next step towards becoming a currency trader.
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There is a big market for currency trading tutorial material. The forex (foreign exchange) trading market is huge, and many experienced traders are now offering training to hopeful beginners or intermediate level traders who want to improve their profits. But can you expect to find good training for free, and if so, what is the best place to go to find it?
There are more and more people pouring into the forex trading sector every day. There is always money to be made and this is certain to attract large numbers. At the same time, the market is not likely to become saturated. There are so many possible trades to make between all the different currencies and banks and private individuals will always need to make currency exchanges.
So why is the forex market so profitable? The answer is that fluctuations in the exchange rates can be intense and very quick, especially in times when the world economy or the economy of a particular country is unsettled. When a country’s currency is constantly changing in value, fortunes can be made in a very short time. That is, if you are lucky – or if you know what you are doing.
This means that people are always hungry for training materials that will help to give them an edge. They want to discover how to predict the rise and fall of the market. That is how cash is made and it is a skill that can be acquired.
So why would a high earning forex trader want to spill his secrets in a currency trading tutorial?
Skilled, experienced forex traders are used to responding to a market. So when they see a demand for teaching their skills, they respond to that market too. Traders want to make money in all possible ways and those ways includes teaching others. Often when a person sets out to teach something, they end up learning new things about the subject themselves. Or sometimes they are tired of just working with numbers all day and want to work with real people for a change!
Nevertheless, a good trader who is giving his time in providing training material will generally expect to get something back. This means that any free forex tutorial, if it is worth investing your time, will have some payback for the trader providing it somewhere down the line. Probably they will send you promotions for other products that they offer. This is not a problem of course, you will not be obligated and you can just ignore these.
This does mean that although the free tutorial may be very useful for you, it will not contain everything that the trader has to teach. He will often be holding back many secrets for his paying members or buyers.
Because of this, free forex tutorials are usually best for beginners. At that level you can learn a lot from a trader just showing you the basics. If you are new to forex it will be much better for you this way and you will be grateful that he does not confuse the issue by throwing in all his advanced strategies into the free currency trading tutorial!
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The following are simple tips on getting into worthwhile forex trading online:
- With a mini forex trading account and a small stake you get a free trading platform and the benefits that regular forex traders get to enjoy. These would include graphs, state-of-the art trading software and other resources.
– Read a good book or two. Perhaps get hold of a net course. A few venders will even give you a free tutorial when you open an account. After all, it is in their interest that you use their services. You won’t stay with them if you lose money every time you make a trade, so it’s in their interest to give you some help.
– You need to know current affairs. Read periodicals and take in the TV news channels to keep updated on currencies’ status, as well factors that influence currency value, such as politics. Also maintain a record of the rise and fall of interest-rates, political and economic factors, bank activities and import and export policies.
– It is often a misperception that FX trading involves a large investment. This is one of the reasons for many traders not entering the forex market, and continue in different markets like trading stocks. Nevertheless, this is not the case. FX traders are able to trade by opening a mini account.
– Investors who want to participate in the FX marketplace but don’t have the time or the know-how to do so still have means to harvest the benefits. Managed forex accounts are accounts that are directed by persons that are part of a pro financial brokerage firm, who have the requisite expertise and knowledge. It is a live FX account funded by an investor, and traded by a professional person. This allows the investor to get a reasonable profit margin without being forced to invest their own time and inexperience in it.
– Any promises of uniform monthly gains of 15% or more are inflated and would never be claimed by any legitimate director. Some traders do manage to develop some amazing short term gains but the gambles taken to produce these are enormous and commonly mean that even the most pro wheeler dealer who stretches his leverage beyond discretion is bound finally to crash.
– The forex market, also known as the currency market covers trading between central banks, large banks, governments, multinational corporations, currency speculators, individual traders, and other financial markets and institutions. It functions by trading pairs of foreign currencies, all of which are gauged against the value of the United States Dollar. You purchase one currency in the pair you’ve selected and sell the other, depending upon your estimate of the value of each. For instance, with EUR/USD, you buy the first and sell the second.
– You can use demo accounts but don’t dupe yourself, you will not make the same decisions as when there’s cash at stake. Take in any TV quiz program and see how many risks you’d take sitting in your house that you would not take if you were sitting in the TV studio.
– Be sure you do your homework to settle on a reputable investment firm you can trust. Otherwise, look for a trading system that works and see if you can do it yourself.
– You are able to lose your whole account balance if you are not careful. One further good thing about FX trading is that you will never lose additional money than is in your account.
I hope these few beginner tips will help you in setting up worthwhile forex trading online.
About the author: Niccolo Svengali is an author for learn forex trading and online forex trading websites in London, UK.