Why Currency Trading Is Not For Everyone

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, it is advisable to seek advice from an independent financial advisor.

How Forex Works

The currency exchange rate is the rate at which one currency can be exchanged for another. It is always quoted in pairs like the EUR/USD (the Euro and the US Dollar). Exchange rates fluctuate based on economic factors like inflation, industrial production and geopolitical events. These factors will influence whether you buy or sell a currency pair.

What is Currency Trading?

Currency trading is when you buy and sell currency on the foreign exchange (or "Forex") market with the intent to make money.

Forex Made Easy For Everyone

Forex made easy is as simple as you would want it to be. The foreign exchange market is a worldwide market and according to some estimates is almost as big as thirty times the turnover of the US Equity markets.

Foreign exchange is the buying and the selling of foreign exchange in pairs of currencies. For example you buy US dollars and sell UK Sterling pounds or you sell German Marks and buy Japanese Yen. Why are currencies bought or sold? The answer is simple; Governments and Companies need foreign exchange for their purchase and payments for various commodities and services. This trade constitutes about 5% of all currency transactions, however the other 95% currency transactions are done for speculation and trade. In fact many companies will buy foreign currency when it is being traded at a lower rate to protect their financial investments. Another thing about foreign exchange market is that the rates are varying continuously and on daily basis. Therefore investors and financial managers track the forex rates and the forex market it on a daily basis.

Those who are involved in the forex trade know that almost 85% of the trading is done in only US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. This is because they are the most liquid of foreign currencies (can be easily bought and sold. In fact the US Dollar is most recognizable foreign currency even in countries like Afghanistan, Iraq, Vietnam etc).

Being a truly 24/7 market, the currency trading markets opens in the financial centers of Sydney, Tokyo, London and New York in that sequence. Investors and speculators alike respond to the ever-changing situations and can buy and sell simultaneously the currencies. In fact many operate in two or more currency market using arbitrage to gain profits (buying in one market and selling in another market or vice versa to take advantage of the prices and book profits).

While dealing in forex, one should have a margin account. Quite simply put if you have US$ 1,000 and have a forex margin account which leverages 100:1 then you can buy US$ 100,000 since you only need 1% of the US$100,000 or US$1,000. Therefore it means that with margin account you have US$ 100,000 worth of real purchasing power in your hand.

Since the foreign currency market is fluctuating on a continuous basis, one should be able to understand the factors that affect this currency market. This is done through Technical Analysis and Fundamental Analysis. These two tools of trade are used in a variety of other markets such as equity markets, stock markets, mutual funds markets etc. Technical Analysis refers to reading, summarizing and analyzing data based on the data that is generated by the market. While fundamental Analysis refers to the factors, which influence the market economy, and in turn how it would affect the currency trading. Of course there are other economic and non economic factors which can suddenly affect the trading of the forex markets such as the 9/11 tragedy etc. One needs to have a shrewd acumen and a few number crunching abilities to strike gold in the forex market.

How To Stop Forex Fraud

Before you start with forex trading you must have a broker. Be careful choosing the right forex broker because this market is not regulated like the other financial markets.

About $2 trillion Dollars per day are traded on the currency market each and every day. It is bigger than any other financial market out there. The main market participants are big companies, central and commercial banks and other institutional traders.

Compared to the stock or futures exchange, there is no forex exchange market. The trades are made directly between the traders. A forex broker gives you access to this market but only to a part of it. A currency broker can make his own prices. If you would open two accounts at two different brokers then you would notice that you will get two different prices for the same buy or sell.

This system of pricing and trading opens a door for fraud and scams. There are forex brokers out there that do not play correctly. It is also allowed for FX brokers to trade against their customers.

When you choose a broker be careful with everything. Check where the money is held, if there is any form of guarantee or security. Check the spread, that means how much is the average difference of the buy and sell price in your currency. Find out for how long your broker is in the game and if the company has any references.

Verify their address and phone numbers, test out the phone support of the trading desk. Check and verify any of the brokers licenses and find out if the broker is regulated by any trusted third party company or authority.

There are some great and serious forex brokers out there which offer excellent trading platforms and support. They are not necessarily more expensive than other currency brokers because they trade more volume instead.

Investing In Forex

Sometimes it`s wise not to be the early bird when investing in forex, instead wait and see what the day will bring before you take action. The 10 A.M. rule is a great example of this concept, and is an example that protects your capital. Let`s say you want to buy a forex stock, for whatever reason; a trend play, or a market rally that you think a currently hot sector will participate in. You know that a great time to buy would be on a gap down, but the market is in rally mode and instead of gapping down, the forex stock gaps up. But buying the gap up is a bad trade. Now what do you do?

You use the 10 A.M. rule, and wait until after 10 A.M. for the right forex stock investing time to buy the stock. If the forex stock makes a new high for the day after 10 A.M., then, and only then, should you trade the stock. Of course, you will use stops to protect yourself, like you would on any trade.

Anyone who`s followed the market knows that a forex stock will often gap up early in the morning, only to suddenly sell off and reverse into negative territory. By following the 10 A.M. rule, you avoid the risk of this sudden reversal. If the forex stock does make it to a new high after 10 A.M., there is still trader interest in the forex stock, and it stands a good chance of gaining momentum and heading even higher.

Here is an example of the 10 A.M. rule on a gap up: A forex stock closes the day at $145. After hours, the company announces a two for one forex stock split. The next morning the forex stocks gaps up to open at $161. It trades as high as $166 before 10 A.M. For two hours after 10 A.M. it trades lower and doesn`t reach $166. At 2 P.M., it hits $166.50. The forex stock is now safe to buy, using the 10 A.M. rule.

Using a version of the 10 A.M. rule, you could watch for a hot sector to appear in the morning and follow the forex stocks in the sector that are up for the day. If the forex stocks are still making new highs at midday, they stand a good chance of finishing the day near their ultimate highs for the day, and could be good trading opportunities. This also applies in a down market and to stocks in forex that gap down, opening at prices lower than where they closed the previous day. In this situation, you should not short a forex stock that has gapped down unless and until it makes a new low for the day after 10 A.M.

Using the 10 A.M. rule ensures that you will never end up chasing and buying a forex stock when your chances of making a profitable trade are low. Remember, trading is all about probabilities. The more forex stock investing trades you make with a high probability of success, the more successful you will be. The 10 A.M. rule is a valuable addition to your trading plan, giving you a straightforward way to avoid making costly mistakes and to increase your number of profitable stock investing trades in forex.

Forex Trading - What do I have to know and do to trade in Forex?

To become a successful Forex Trader consider the following:

Maximize Your Tools
It is of the utmost importance to know your tools. The varius brokers offers an array of tools that are used for trading the Forex markets. Be sure to test any demo accounts offered and use the opportunity to "learn" the tool.

Risk Management
Every successful trader should know how much risk he is willing to take, and what profits should result from the trade. This is the basis of every realistic trading strategy.

Two Ways to Trade
There are two types of traders, technical and fundamental. Both have a radically different approach to making trading decisions.

The Basics of Technical Analysis
All technical analysis starts with a few basic building blocks. With these as a foundation, you can start to make sound trading decisions.

Fundamentals Everyone Should Know
All Traders should understand why economic releases, interest rates, and international trade are important to movements in the currency market.

Psychology of Trading
The biggest enemy to most traders is not the market, but themselves. Study and learn all you can about Forex trading.