Forex Trading for Beginners
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As an enthusiastic and reasonably successful forex trader, I would like to give you a basic introduction to forex
trading, a popular pursuit for anyone including retirees or
people living in foreign countries.
Forex trading can be done
without your own computer, such as from an internet cafe, airport
lounge or hotel, because it can be 'web-based'. That means no need
to download special software; it can even be done from a mobile
Forex trading does not mean you actually
pay for foreign currency; you merely take a temporary 'option' to buy or
sell it, often the same or next day, but trades can remain open for long
Forex trading can be semi- or even fully
automated by using trading robots called 'expert advisors' or EAs.
The aim of these pages is to give
you the basics of forex trading so there is no need for you to jump in head first
and be overwhelmed with technical jargon sales hype and false promises from many
sources, some good, some not, and some merely trying to sell you knowledge
and facilities that are sometimes available for free.
Forex (currency trading) defined
The abbreviations come from Foreign exchange (simultaneously
exchanging one major currency for another). Most transactions are
made between US dollars and a second currency. Transactions are made using
online trading systems made available by banks and
in different countries. Rates of exchange (the value of one currency rated against another) vary constantly
by small amounts (called pips). A forex trader
can choose to buy or sell a pair in order to profit from a
relatively small change in the rate.
The change in forex rates seen in the short
term, such as a few minutes, is often very small. It might be only 0.0001 percent.
However, profit is still achievable; a trader who buys standard 'lot' of
100,000 units of a base currency e.g. the GBP, with a unit price of $1.7159
(mid 2014 rates),
would be sure to make more than $100 profit if the value rose by just 0.001
percent during the day. If he held this level of trade for a month, it would
be some $3,000 or $36,000 per year from capital of $100,000 dollars, a 36%
annual return, unlikely elsewhere in today's markets.
This explains the term forex PIP: Percentage In Point i.e. the
percentage of a single percentage point (1%) that a currency changes within
a day. The pip is the smallest change in price of a currency used in the
The way that a trader with low capital can
trade full lots is by using the leverage typically offered by most
brokers, up to 400:1, but leverage
and margin need to be fully understood by forex traders in order to
avoid unnecessary losses.
Forex Trading Objectives
The objective of forex traders is to profit from
buying then re-selling currencies of different
countries. The forex market trades in currency pairs like the British Pound and the
US Dollar (shown as GBP/USD) or the US Dollar and the Japanese Yen (USD/JPY). There
are several major pairs that traders can choose from, as well as other
currencies, market indices and precious metals.
A currency is purchased at the current (spot) market price which can be re-sold
at any time, at a
higher or lower price. The difference in value between the buying and
selling price is measured in pips (one pip equals around $10). This then
becomes the profit (or loss) on that trade, and the value is credited or
debited to your account with the forex broker who holds your trading
main participants and when they trade
Although virtually anybody can trade, international currency values are
influenced (but not controlled) by the world’s largest commercial banks and
houses, and governments who make sometimes vast transactions
With a daily turnover of 2 trillion US Dollars, (100 times bigger than the
stock market) the forex market is by far the
market in the world, making it impossible for an individual or small group
of traders to
'corner' or control it for any period of time.
Unlike stock and commodities markets, the forex market is open for 24 hours
per day for more than five days a week. Most trades, especially larger
ones, are conducted during business hours
in the main financial markets
of New York, London, Zurich and Tokyo. Although
they operate in different time zones, there are periods when two or more
open simultaneously, and these are the most active 'time slots'.
Unlike the world's stock markets and
commodities exchanges which are open fixed hours, the forex market, apart
from a break between Friday and Sunday afternoons, is 'open for business'
24 hours a day somewhere. Forex trading follows the sun's daily path,
beginning in the Asia Pacific financial centres of New Zealand,
Australia, China and Japan, then SE Asia and India on to the
Middle East then Russia, Europe and the United
Kingdom and finally across the Atlantic Ocean to North America,
by which time Asia is already trading on the following day. Forex is
truly a continuous global market.
However, it's important to know when the
markets are at their most active, as this is when you are likely
to have the best chance of success in forex trading. You can download a free 37 page
"Cheat Sheet" with free Retire-Asia site membership. There is a lot of other useful
information on several different topics too on Retire-Asia members'
download page, but use the drop down box to join the Trading Group.
Reload this page if you missed it.
Forex trades take place when
dealers or brokers can
find 'matching' buyers and sellers on the international market, but in
practice smaller trades are carried 'in house' by brokers who almost always
have customers trading in both directions. Forex traders can be based
anywhere there is access to
the internet – even
lazing on a beach in the tropics, trading from a laptop computer with a wireless connection
– and even from mobile phones!
Many people including retirees all around the world have found forex trading an
interesting, mentally stimulating diversion and, with some experience, a significant extra income source.
How is forex trading carried out?
Foreign currency trading is carried out using programs supplied
free by forex brokers based in many countries around the world. An individual can open an account with a broker,
and be given free training and the necessary facilities which enable him or
her to monitor the market using on-line charts and other indicators, then make
real-time transactions online. It is not necessary to have high
speed internet access, but a reliable connection can be important while short term trades
Forex day trading does not involve buying and selling actual currency; it's more like taking a temporary 'option' on it,
for which you put up a small deposit.
Most beginners start with a free demo account which does not require
'real' money at all. Find a popular,
easy-to-use CFD forex dealing desk. When you are ready, you can open a demo
or live trading account
then start trading with the user-friendly
interface or 'trading platform'.
A small part of the money you deposit in your
trading account is used
– like a guarantee for each trade while it is in progress. A trader may enter
several trades simultaneously. When a trade is complete, the guarantee is
returned to the account, together with any profit.
Standard trades are conducted in
$100,000 'lots', but only a small amount (1%) of this is required to be used as a
guarantee for a running trade. Typically, experienced traders will lodge between
$2,000 and $50,000 with their bank,
broker or dealer, but rarely
risk more than 2-5%
of this for trade guarantees at one time.
Live trading with low risk
'Mini' and 'micro' accounts can also be opened with much less,
to a few hundred dollars. These accounts work
the same way as standard accounts, usually of several thousand dollars, but trades (and profit or loss) are made at
lower proportions of full 'lot' values. Trading with low amounts lowers the risk of loss for
new or inexperienced traders.