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 periods too.
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 forex dealers 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 forex market.
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 account.
The 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 finance houses, and governments who make sometimes vast transactions every day. With a daily turnover of 2 trillion US Dollars, (100 times bigger than the stock market) the forex market is by far the largest financial 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 exchanges are 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 major forex 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 are running.
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 as collateral – 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, from $50 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.
Free demonstration (virtual) accounts
Forex trading can be done without risking 'real' money with a free 'demo' or 'virtual' account available from most brokers. This is fun and is a useful way to gain trading experience, but it can instil false confidence and lead to the erroneous impression that successful 'paper trades' i.e. those not involving real money, are an indication of how easy profitable forex trading can be. The difference is in mental attitude while trading rather the performance and causes or analysis of currency price movement.
Free Online Forex Training Course
Watch videos and learn how to trade Forex forex step-by-step. Lessons are available in the English, German, French, Italian, Spanish, Arabic, Russian and Chinese.
Learning how to trade forex for consistent profit
The main thing to realise is that to trade forex successfully and consistently profitably requires knowledge, experience and self discipline. If you are seriously considering forex trading as a primary source of income (and it certainly can be), then it's worth investing in your education by getting a single complete, comprehensive training and trading strategy program.
If you're serious about becoming a successful foreign currency trader, then take a professional forex course. The money invested will be recouped rather than lost in addition to unnecessary trading losses that will inevitably occur if you start trading without the correct knowledge and techniques, including understanding risk management and the psychology of trading.
More about Forex trading on Page Two and Page Three.
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