Sunday, 24 April 2011
Monday, 18 April 2011
WHAT IS FOREX
PART 1
What is Forex?
Forex is the acronym for Foreign Exchange. It is the market place where the currencies of the world are traded. The Forex market is also regarded as the largest market in the world with a daily turnover of around 3.2 trillion dollars. This is thrice the size of the combined US equity and Treasury markets. The Forex market is also unique when compared to the other financial markets as it has no centralized or physical location. It is just a network of banks, financial institutions, hedge funds, corporations and retail traders buying and selling currencies with one another. Because of this unique characteristic, the Forex market is not bound by a single time zone. It operates on a 24 hours timeline from one time zone to another where all the major financial centers are located.
Previously, the only way a retail trader can access the Forex market was through the commercial banks that deal with currency trading for investment and trade purposes. In 1971, when the major currencies of the world floated their currencies, trading in currencies increased tremendously. Nowadays, apart from importers and exporters dealing with Forex, there is a whole new array of market participants in the Forex market. They include hedge funds, portfolio managers, speculators and the retail traders. Each individual group of market participants has differing objectives for dealing in Forex. They range from payment for goods and services to risk hedging to pure speculation.
By definition, Forex trading is the action of swapping currencies from different nations with each other at a rate determined by the Forex market. For example the currency used in the European community is the Euro while the currency for the United States is the US dollar. Thus, when a trader buys the Euro, he will also be selling the US dollar at the same time. In Forex terms, this means going long with the Euro and US currency pair (EUR/USD).
Generally, to trade in Forex, you need to go through a market maker or a Forex broker. As a retail Forex trader, you will select the currency pair that you want to trade in. the selection will be based on your own analysis. Normally, the Forex broker will not be making any recommendation to you but will just execute your trading orders.
To make money on Forex trading, you can either take a long market position or go short on your market position. By going long, you are buying a currency pair and hoping to sell it later at a higher rate and thus profiting from the differences between what you paid for and what you got from selling the currency pair. Going short is the opposite scenario. In this situation, you will be selling a currency pair at the current market rate and hope to buy them back later at a lower rate. This is one of the main attractions of the Forex market. You can profit from the market regardless if it is a bull or bear market. As long as you can predict which direction the market is heading, you can position yourself to take advantage of the market trend.
What is Forex?
Forex is the acronym for Foreign Exchange. It is the market place where the currencies of the world are traded. The Forex market is also regarded as the largest market in the world with a daily turnover of around 3.2 trillion dollars. This is thrice the size of the combined US equity and Treasury markets. The Forex market is also unique when compared to the other financial markets as it has no centralized or physical location. It is just a network of banks, financial institutions, hedge funds, corporations and retail traders buying and selling currencies with one another. Because of this unique characteristic, the Forex market is not bound by a single time zone. It operates on a 24 hours timeline from one time zone to another where all the major financial centers are located.
Previously, the only way a retail trader can access the Forex market was through the commercial banks that deal with currency trading for investment and trade purposes. In 1971, when the major currencies of the world floated their currencies, trading in currencies increased tremendously. Nowadays, apart from importers and exporters dealing with Forex, there is a whole new array of market participants in the Forex market. They include hedge funds, portfolio managers, speculators and the retail traders. Each individual group of market participants has differing objectives for dealing in Forex. They range from payment for goods and services to risk hedging to pure speculation.
By definition, Forex trading is the action of swapping currencies from different nations with each other at a rate determined by the Forex market. For example the currency used in the European community is the Euro while the currency for the United States is the US dollar. Thus, when a trader buys the Euro, he will also be selling the US dollar at the same time. In Forex terms, this means going long with the Euro and US currency pair (EUR/USD).
Generally, to trade in Forex, you need to go through a market maker or a Forex broker. As a retail Forex trader, you will select the currency pair that you want to trade in. the selection will be based on your own analysis. Normally, the Forex broker will not be making any recommendation to you but will just execute your trading orders.
To make money on Forex trading, you can either take a long market position or go short on your market position. By going long, you are buying a currency pair and hoping to sell it later at a higher rate and thus profiting from the differences between what you paid for and what you got from selling the currency pair. Going short is the opposite scenario. In this situation, you will be selling a currency pair at the current market rate and hope to buy them back later at a lower rate. This is one of the main attractions of the Forex market. You can profit from the market regardless if it is a bull or bear market. As long as you can predict which direction the market is heading, you can position yourself to take advantage of the market trend.
What Is Forex Part 2
Forex – From Banks to the Internet
Ever since the 1970s, due to increasing globalization of international trade, international financial transactions are becoming more common as compared to 50 years ago. This has resulted in the Forex market undergoing a profound transformation not only in terms of volume traded but also in terms of coverage, structure and method of transactions. Among some of the major structural changes that have occurred in the Forex market are:
• Massive wave of deregulation in the global financial sector
Many Governments in countries all over the world have eliminated their control and the limitations placed on the financial sector in order to spur a growth in the financial system. The result of this is increased competition both domestically and internationally among the various financial institutions.
• Fundamental movement towards globalization and institutionalization in the saving and investment sectors
As a result of this amalgamation, financial institutions and fund managers around the world have more access to a greater pool of funds for investment purposes. With a view for diversification, investments pour across national borders and currencies in increasingly larger quantum as these institutional funds look for greater profitability.
If our world operates with just a single currency, there would be no Forex market or Forex rates. However, our reality comprises of differing sovereign nations with their own respective national currency. Thus, the Forex market plays a crucial role in helping to facilitate trades among the various nations of the world. Without the Forex market, there will be no mechanism for facilitating payments between exporters and importers of goods & services. Prior to the last two decades, the Forex market was generally determined by mainly the commercial banks as they were the main go-between for trading partners.
However, with the liberalization of the financial sectors, the Forex market had expanded exponentially from a situation the commercial banks were the main players among themselves to include a larger group of market participants. They included the brokers and market makers as well pension funds, hedge funds and investments firms. The focus of the Forex market widened from servicing international trading partners to accommodating huge amounts of overseas capital flows. As trading in Forex became more widespread, competition became more intense resulting in numerous firms beginning to offer Forex trading facilities to the small retail trader.
Immense technological progress in computing powers and the World Wide Web also helped to spurs the development of the Forex market. With increasing competition among the various financial institutions and brokerage firms, this has resulted in lower margin. The timely arrival of these technological progresses also helped these firms to lower their cost and offer even more competitive services for the small retail investors.
The internet allows for real time execution of trades and access to huge amount of global market information. The result is a paradigm shift from trading with a brick & mortar institution like a bank to a virtual world of online Forex brokers. Today, the financial markets are still undergoing developments. It has grown larger than anyone can ever envisaged and will continue to do so as the small retail investor becomes more and more sophisticated.
• Massive wave of deregulation in the global financial sector
Many Governments in countries all over the world have eliminated their control and the limitations placed on the financial sector in order to spur a growth in the financial system. The result of this is increased competition both domestically and internationally among the various financial institutions.
• Fundamental movement towards globalization and institutionalization in the saving and investment sectors
As a result of this amalgamation, financial institutions and fund managers around the world have more access to a greater pool of funds for investment purposes. With a view for diversification, investments pour across national borders and currencies in increasingly larger quantum as these institutional funds look for greater profitability.
If our world operates with just a single currency, there would be no Forex market or Forex rates. However, our reality comprises of differing sovereign nations with their own respective national currency. Thus, the Forex market plays a crucial role in helping to facilitate trades among the various nations of the world. Without the Forex market, there will be no mechanism for facilitating payments between exporters and importers of goods & services. Prior to the last two decades, the Forex market was generally determined by mainly the commercial banks as they were the main go-between for trading partners.
However, with the liberalization of the financial sectors, the Forex market had expanded exponentially from a situation the commercial banks were the main players among themselves to include a larger group of market participants. They included the brokers and market makers as well pension funds, hedge funds and investments firms. The focus of the Forex market widened from servicing international trading partners to accommodating huge amounts of overseas capital flows. As trading in Forex became more widespread, competition became more intense resulting in numerous firms beginning to offer Forex trading facilities to the small retail trader.
Immense technological progress in computing powers and the World Wide Web also helped to spurs the development of the Forex market. With increasing competition among the various financial institutions and brokerage firms, this has resulted in lower margin. The timely arrival of these technological progresses also helped these firms to lower their cost and offer even more competitive services for the small retail investors.
The internet allows for real time execution of trades and access to huge amount of global market information. The result is a paradigm shift from trading with a brick & mortar institution like a bank to a virtual world of online Forex brokers. Today, the financial markets are still undergoing developments. It has grown larger than anyone can ever envisaged and will continue to do so as the small retail investor becomes more and more sophisticated.
What is Forex Part 4 - Tips For New Forex Traders
With around 3 trillion US dollars worth of currencies traded daily, the Forex market is the largest financial market in the world. It is an extremely exciting business to be in as it provides a simple way for both the traders and investors to build up profits rapidly. Nevertheless, for those new to the Forex market, it is crucial to know exactly what you are getting yourself into. You should not deal in the Forex market if you are clueless as to what the Forex market entails. Despite having said this, we still countless novice traders repeating the same mistakes over and over again. Some of these common errors that the make include:
• Not embracing the correct outlook toward trading in the Forex market.
• Not having the right attitude
• Unable to differentiate the significances of the different currencies traded.
• Having poor management of their trading as well as implementation of their trading strategy.
Outlook:
Many novices fail to appreciate the importance of having the correct outlook toward trading in the Forex market. This is actually about making the proper preparations before beginning to trade in the Forex market. First of all, a novice trader must coordinate his personal goals and mindset so that he can connect with the market as well as with the tools used in Forex trading.
For example, the Forex trader need to think about the time frame with which he is most at ease with when it comes to trading. Using short time frame charts like a 5 minute chart will imply that you should be at ease with market position without risk of overnight exposure. On the other hand, if you prefer to trade with weekly charts, this would imply that you are acceptable to the risk of overnight exposure. It would also mean that you can deal with the fact you will not be trading for several days.
The Right Attitude:
The right attitude would entail having the following traits in one’s mindset like:
• Discipline
• Objectivity
• Patience
• Having realistic expectations
Able to discern the significance between the various currencies traded:
Not all currency pairs are created equal. Each currency pair is being traded for different fundamental reasons. Simultaneously, different market participants go for different currency pairs. The way a bank will trade differs significantly from the way a Hedge fund conducts its business. A speculator will also have a different trading philosophy form that of retail Forex traders. Therefore, in order to capitalize on any opportunities, you need to be able to appreciate these different motivations of the market participants.
Proper management and strategy implementation:
Although no Forex trading strategy is 100% foolproof, this does not mean you can forgo having one while trading in Forex. It still provides a roadmap for you to measure your progress in making your trading decisions. Even though you will incur some losses along the way, at the very least your can see what is the ratio of profits to losses when you implement a particular trading strategy.
Conclusion:
With the countless number of trading techniques that are available today, it is difficult to say which is better and which is no good. What is important for you as a trader is that you must feel comfortable with the trading strategy that you adopted. As the Oracle of Omaha Warren Buffet, use to say there are only two rules in investment. The foremost rule is “Never lose money” while the second rule is “Always remember the first rule”.
• Not embracing the correct outlook toward trading in the Forex market.
• Not having the right attitude
• Unable to differentiate the significances of the different currencies traded.
• Having poor management of their trading as well as implementation of their trading strategy.
Outlook:
Many novices fail to appreciate the importance of having the correct outlook toward trading in the Forex market. This is actually about making the proper preparations before beginning to trade in the Forex market. First of all, a novice trader must coordinate his personal goals and mindset so that he can connect with the market as well as with the tools used in Forex trading.
For example, the Forex trader need to think about the time frame with which he is most at ease with when it comes to trading. Using short time frame charts like a 5 minute chart will imply that you should be at ease with market position without risk of overnight exposure. On the other hand, if you prefer to trade with weekly charts, this would imply that you are acceptable to the risk of overnight exposure. It would also mean that you can deal with the fact you will not be trading for several days.
The Right Attitude:
The right attitude would entail having the following traits in one’s mindset like:
• Discipline
• Objectivity
• Patience
• Having realistic expectations
Able to discern the significance between the various currencies traded:
Not all currency pairs are created equal. Each currency pair is being traded for different fundamental reasons. Simultaneously, different market participants go for different currency pairs. The way a bank will trade differs significantly from the way a Hedge fund conducts its business. A speculator will also have a different trading philosophy form that of retail Forex traders. Therefore, in order to capitalize on any opportunities, you need to be able to appreciate these different motivations of the market participants.
Proper management and strategy implementation:
Although no Forex trading strategy is 100% foolproof, this does not mean you can forgo having one while trading in Forex. It still provides a roadmap for you to measure your progress in making your trading decisions. Even though you will incur some losses along the way, at the very least your can see what is the ratio of profits to losses when you implement a particular trading strategy.
Conclusion:
With the countless number of trading techniques that are available today, it is difficult to say which is better and which is no good. What is important for you as a trader is that you must feel comfortable with the trading strategy that you adopted. As the Oracle of Omaha Warren Buffet, use to say there are only two rules in investment. The foremost rule is “Never lose money” while the second rule is “Always remember the first rule”.
For Existing Traders - Are You Facing A Sickening Trade?
Here's The Answer
If you're afraid to trade right now (because you're afraid of losing money), then this is for you.
Listen. You don't want to lose money; neither do I. But it's a fact of trading that you will sometimes lose. The trick is to win more than you lose. You must give yourself enough trades to make this a reality.
If you only make four trades, and you see that you've lost more than you've made, you're not giving yourself a fair chance. You will need more than four trades for gains and losses to average themselves out.
Of course, you will also need a proven method of trading. Not every trade or sequence of trades is a winner, but we win more trades than we lose and our wins are usually bigger than our losses.
To be a winning trader you first need a method that works consistently.
Listen. You don't want to lose money; neither do I. But it's a fact of trading that you will sometimes lose. The trick is to win more than you lose. You must give yourself enough trades to make this a reality.
If you only make four trades, and you see that you've lost more than you've made, you're not giving yourself a fair chance. You will need more than four trades for gains and losses to average themselves out.
Of course, you will also need a proven method of trading. Not every trade or sequence of trades is a winner, but we win more trades than we lose and our wins are usually bigger than our losses.
To be a winning trader you first need a method that works consistently.
You also need to give yourself room to win. I suggest a bare minimum of 10 trades. Twenty would be even better.
Out of 10 trades, you will begin to see a pattern. You may win 6 and lose 4. If you win a decent profit on those 6 winning trades -- and lose only a little on your 4 losing trades -- your trading account will most definitely be up.
Over the course of 20 trades, you may find you win 13 and lose 7. Naturally, the more trades you make, the more predictable your win/lose percentage will become. This is a big key to long-term trading success. And don't quit. With both time and a winning method on your side, you literally can't fail.
Here is some advice you can take to the bank: "The key to trading is not to look for the big move but to stay on the right side of the market so, when the big move comes, you are there. That way catching big moves is not luck, it is inevitable."
Over the course of 20 trades, you may find you win 13 and lose 7. Naturally, the more trades you make, the more predictable your win/lose percentage will become. This is a big key to long-term trading success. And don't quit. With both time and a winning method on your side, you literally can't fail.
Here is some advice you can take to the bank: "The key to trading is not to look for the big move but to stay on the right side of the market so, when the big move comes, you are there. That way catching big moves is not luck, it is inevitable."
What is Forex Part 3 - Forex Brokers
Choosing a Broker
There are many forex brokers to choose from, just as in any other market. Here are some things to look for:
There are many forex brokers to choose from, just as in any other market. Here are some things to look for:
- Low Spreads - The spread, calculated in "pips", is the difference between the price at which a currency can be purchased and the price at which it can be sold at any given point in time. Forex brokers don't charge a commission, so this difference is how they make money. In comparing brokers, you will find that the difference in spreads in forex is as great as the difference in commissions in the stock arena.
Bottom line: Lower spreads save you money!
- Quality Institution - Unlike equity brokers, forex brokers are usually tied to large banks or lending institutions because of the large amounts of capital required (leverage they need to provide). Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company.
Bottom line: Make sure your broker is backed by a reliable institution!
- Extensive Tools and Research - Forex brokers offer many different trading platforms for their clients - just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental commentaries, economic calendars and other research.
Bottom line: Find a broker who will give you what you need to succeed!
- Wide Range of Leverage Options - Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).
Bottom line: If you have limited capital, make sure your broker offers high leverage. If capital is not a problem, any broker with a wide variety of leverage options should do. A variety of options lets you vary the amount of risk you are willing to take. For example, less leverage (and therefore less risk) may be preferable for highly volatile (exotic) currency pairs.
- Account Types - Many brokers offer two or more types of accounts. The smallest account is known as a mini account and requires you to trade with a minimum of, say, $250, offering a high amount of leverage (which you need in order to make money with so little initial capital). The standard account lets you trade at a variety of different leverages, but it requires a minimum initial capital of $2,000. Finally, premium accounts, which often require significant amounts of capital, let you use different amounts of leverage and often offer additional tools and services.
Bottom line: Make sure the broker you choose has the right leverage, tools, and services relative to your amount of capital.
- Sniping or Hunting - Sniping and hunting - or prematurely buying or selling near preset points - are shady acts committed by brokers to increase profits. Obviously, no broker admits to committing these acts, but a notion that a broker has practiced sniping or hunting is commonly believed to be true. Unfortunately, the only way to determine which brokers do this and which brokers don't is to talk to fellow traders. There is no blacklist or organization that reports such activity.
Bottom line: Talk to others in person or visit online discussion forums to find out who is an honest broker.
- Strict Margin Rules - When you are trading with borrowed money, your broker has a say in how much risk you take. As such, your broker can buy or sell at its discretion, which can be a bad thing for you. Let's say you have a margin account, and your position takes a dive before rebounding to all-time highs. Well, even if you have enough cash to cover, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you dearly.
Bottom line: Again, talk to others in person or visit online discussion forums to find out who the honest brokers are.
Subscribe to:
Posts (Atom)