Introduction to Foreign Currency Trading - 1
This is an introduction for those unfamiliar with international forex trading. More detailed information can be found here on Retire-Asia, as well as other sites. We will be offering links to some of them. We aim to give you just a basic idea, so there is no need for you to jump in ‘head first’ and be bombarded or overwhelmed with sales hype and promises from many sources, some good, some not, and some merely trying to sell you knowledge and facilities that are available absolutely free! There are plenty of forex resources available on the internet, but sometimes it's nice to get hold of a real book. Amazon has several good forex titles for sale.
So, what is currency trading, anyway?
The abbreviations come from Foreign exchange (the business of exchanging one country’s currency for another). Rates of exchange between currencies (the value of one currency rated against another) vary constantly by small amounts (called pips), and are affected by many factors including national and international events, economic results and indicators, government borrowings, balances of payment and others. Real understanding of this would require years of study and a degree in economics, but even this would not give any guarantee of success in the currency trading market!
Who are the main ‘players’?
Although virtually anybody can trade, international currency values are influenced more by the world’s largest commercial banks and finance houses, and governments who are making sometimes vast transactions continuously while markets are open, than any individual or group of traders. With a daily turnover in the forex market approaching 2 trillion US Dollars, it is by far the largest financial market in the world, and it would be unlikely for an individual or small group of traders to 'corner' or control it for any period of time.
Unlike other financial and stock markets, the forex market remains open for 24 hours per day, from 4.30 pm on Sunday through 4.30 pm Friday EST (New York time). Trading activity and price movement increase when two or more of the main financial markets of New York, London, Zurich and Tokyo are open simultaneously. You can download a useful table to see the best times to trade from your own location by visiting our Contact page and registering for free.
How is trading carried out?
Foreign currency trading is handled electronically using the internet, by banks and on-line broking houses, based in many countries. 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 using a computer-based 'trading desk' while connected to the broker via the internet. It is not necessary to have a fast connection, but reliability of the link is important while trading.
Transactions are generally conducted in ‘lots’ of approximately $100,000 value.
However trading does not actually involve the purchase of any currency, but merely the taking of an ‘option’ on it. A deposit (usually 1%) is put up as a guarantee while a trade is in progress. So there is a minimum account balance for funds that have to be lodged with a broker in advance. (Mini accounts can also be opened; these trade at one tenth of the transaction values of a regular account and can be opened for $500 or less. A standard account will require an initial investment of up to five thousand US dollars, depending on the bank or broker.
Before going any further, we should point out that the way every new or potential trader can (and should) begin learning forex is by opening a free ‘demo’ account which involves absolutely no expense or risk of loss of money, but does allow ‘real time’ trading in the open market. There is no time limit on this type of account, and live trading should not be contemplated until confidence and knowledge has been built up. Forex trading is most definitely not a way to instant wealth. There is a strong likelihood of loss, but there are those who will try and convince you otherwise. Please be warned!
What are the objectives?
Basically, the object of forex trading is to try to make a profit from buying and re-selling after a chosen time, the currencies of different countries. These are available in ‘pairs’ such as the British Pound and the US Dollar (GBP/USD) or the US Dollar and the Japanese Yen (USD/JPY). There are many pairs that traders can choose from, and also including precious metals which are valued against the dollar.
A currency is purchased at the current market price and then sold at a higher or lower market 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 amount is credited or debited to your account with the broker, who takes no commission on transactions.
See the next page for a trading example and further information.
For free resources you can download now, just register here.
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