WELCOME to the world of trading foreign exchange, or Forex or FX. The biggest financial market in the world and increasingly the choice of individual traders armed with just a mouse, computer and high-speed Internet connection.
Once seen as just a market for professional traders, trading Forex has become easier than ever for all types of investor as new electronic trading platforms have emerged and greater transparency and information flows have made it accessible to all. In addition, the benefits of currency trading for individuals have become more widely appreciated.
Forex traders have access to global currency markets 24 hours a day during the working week (actually six and a half days) and can take advantage of rolling news to take decisions on their positions in the world's major currencies. Given the sheer scale of trading - about US$ 2 trillion dollars every day - there is never any problem with liquidity. In fact, it is estimated that only 5% of global currency trading is to do with the actual demand by governments, businesses and travelers for foreign currency. The rest is attributed to speculation on Forex movements caused by economic, political and social events as they occur.
Potentially Substantial Rewards
Forex traders have to be ahead of the game to succeed and the rewards can be substantial, given the opportunity to leverage up trades far more than in most futures trading or equity markets. MultiBank Group offer leverage of 100-200-300-400 or 500 to 1, meaning that US$100,000 or US$100,000 of foreign currency can be traded with only US$1,000 or US$500(called margin).
Obviously, this can lead to significant gains from only small currency movements, although - as ever - there are downside risks.
But the opportunity to identify several trading opportunities during every 24 hours cycle with such leverage is clearly of massive appeal to anyone who is a trader at heart.
There are other significant advantages to Forex trading, such as a tight and transparent spread, speed of execution and lower trading costs than for any other market.
Such pragmatic issues are of concern to the serious Forex trader who realizes that, while taking positions on currency movements with the many variables involved obviously is risky, Forex trading is well suited to trend trading. In no other market is the old saying 'the trend is your friend' more applicable; currencies have a history of moving in identifiable trends because of the factors that drive them, such as interest rate cycles and balance of payments imbalances.
But currencies also respond to day-to-day influences from changing political and economic news, thus throwing up opportunities on which fortunes can be made.
To summarize, therefore, the advantages for individuals of Forex trading include:
How Forex Trading Works
So, how does it work? At its heart, is the fact that Forex trading depends on matching a buyer and seller over the electronic network provided by the trading platform. There is no centralized exchange, as with the equity or futures markets, as dealings are between banks, market makers or STP brokers such as MultiBank Group.
Most trades are in the world's major currencies - the US dollar, yen, euro, pound, Swiss franc, Canadian dollar and Australian dollar. These account for more than 85% of all currency transactions and are the most popular for traders because they are currencies, which show constant movement. Smaller currencies may show little divergence from the major currency they 'shadow', although of course opportunities do arise.
To make a trade, a currency has to be paired with another one. It is by taking a position on the changing relationship between those two currencies that profits can be made or losses incurred.
The base currency - often the US dollar - is often quoted first and with a value of one. The second currency is therefore the amount, which one-dollar could buy.
Forex trades are usually quoted in bid/ask terms. Basically this is a snapshot of the point at any one time where the counter-party bank or market maker is willing to sell and where it is willing to buy.
The difference between the bid and ask price is known as the spread, which is how the firm quoting the spread makes its money.
Currency pairs are also often expressed to four decimal places and are described in terms of 'pips' - the acronym for Price Interest Point. Thus a move from 1.0000 to 1.0001 is called one-pip.
Mastering the Basics
Probably the most common error made by novice Forex traders, experts believe, is in the size of the position. Typically, many trade in just one currency lot (usually valued at US$100,000) but this can lead to decisions taken on the basis of emotion and ignoring indicators.
One solution is to add a second lot for each trade, enabling the trader to get in and out to meet cash flow or other requirements but stay in when the technical indicators say so.
After mastering the basics, the success of Forex trading depends on a continuing awareness of the technical tools of the job - understanding how to read charts and monitoring the daily news flow.
But an understanding of fundamentals is also vital. The strength of the US or euro zone economies is basic to currency movements, just as is political changes or sudden shocks to the system, such as the events of 9/11. Interest rate movements too, are critical.
Be a trader
Typical Trade:So typically, a trade could go as follows.
A: A trader has US$5,000 in his account and decides that the US dollar is overvalued against the euro. To benefit from this insight he has to sell dollars - simultaneously buying euros - and wait for the exchange rate to rise (e.g. the euro is expected to buy more US dollars in the future.
B: The current bid/ask price available on the trading screen is quoted as EUR per US dollar and shown as 1.3296 at 1.3301. This means one euro will cost you US$1.3301. The spread is five pips.
C: With available leverage of 100 to 1 the trader executes the deal buying EUR100, 000 and selling US$133,010. (The initial margin is taken as a deposit from the trader's account is just US$1,000, leaving US$4,000 available.)
D As anticipated, the EUR/USD exchange rate rises to 1.3796 at 1.3801 i.e. EUR1 can be sold for US$1.3796. As the trader is holding a long position on euros and short on US dollars, he will need to buy dollars and sell back euros to realize any profit.
E: The trader closes his position, selling the one lot of EUR100, 000 and getting back US$137,960. As he originally paid US$133,010, his profit is US$4,950.
Although it might seem complicated at first, such trades quickly become second nature. To learn more about Trading, the best option is to open a FREE demo account and test your skills!
To open a Demo Account, please click here: http://en.mexgroup.com/forex-account/demo-account/