The simple sense of Forex (Forex currency exchange, Foreign Exchange)
is simultaneous purchase and sale of the currency or the exchange of
one country's currency for the one of another country. The world currencies
do not have a fixed exchange rate and are always fluctuating, since
each are traded in the currency pairs like Euro/Dollar, Dollar/Yen and
others. 85% of daily trades are taken by major currencies trading.
Investments
usually deal with 4 major pairs: Euro against US dollar, US dollar
against Japanese yen, British pound against US dollar, and US dollar
against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to
sign these pairs accordingly. These major pairs are considered as the
Forex market's "blue chips.� You will not receive any dividends on the
currencies. Well known "buy low - sell high" gives the profit for
currency trades.
In case you have a forecast that one currency
would get higher to another, you can exchange the second one for the
first one and wait for the profit. If you are lucky to see the trades
following your forecast you can make an opposite transaction and to
exchange currencies back gaining the profit.
Forex brokerage companies,
also known as major banks dealers, carry out Forex transactions. Forex
market is worldwide and your European colleagues may make a transaction
with Japanese traders when it is time for you to sleep in the North
America. There are 3 shifts for the major institutions to work in due to
24-hours a day activity of the Forex market. It's possible to ask for
overnight execution for take-profit and stop-loss orders of the client.
Prices in the Forex market
fluctuate without any dramatic changes unlike stock market where
considerable gaps are likely to be seen. There isn't any problems
entering and exit the market due to its daily turnover of about $1.2
trillion. Forex market can never be forced to stop. The transactions
were carried out even in 2001, on September 11th.
Foreign exchange market
(also called Forex of FX to shorten the name) is the oldest market in
the world. It is also seen to be the largest one. Since currencies'
primary market work 24-hours a day, Forex is also the largest market
with highest liquidity. This is an interbank market carrying out spot
(or cash) transactions. The currency futures market, to be compared with
Forex is traded only 1% as much.
Forex market
does not have any exchange center unlike the stock market. Forex trading
seem to go after the sun around the world, from banks of the United
States to other parts of the world like Australia, New Zealand, the Far
East or Europe and back to the US some time later.
High minimum
amount of transaction and strict financial requirements used to make
this interbank market unavailable for small speculators. The only
dealers of currency markets were banks, huge-amount speculators, and
largest currency dealers. They had an ultimate access to this market
dealing with lots of primary exchange rates of the world currencies, the
market with an extremely high liquidity along with an unusually strong
nature of trends.
Nowadays small traders have an opportunity to
purchase the small lots (units), because of the large inter-bank units
being split by market maker brokers like FX Solutions, at the amount
they like.
The traders of any size like small companies and
individual speculators have an access to the market at the same price
fluctuations and exchange rates, which only large players used to enjoy
recently. Market makers monitor the rates so that produce their profit
on the difference of rates at which the currency was bought and sold.
Foreign
Exchange Market has an acronymic name Forex. It has the largest size
and the liquidity throughout the world nowadays. Forex daily
transactions are carried out at the common amount from 1 to 3 trillion
dollars. No stock market is able to deal with a comparable amount of
money.
This enormous market is like the dangerous sea where you
can meet lots of sharks and dangerous waters but at the same time, it is
the only one where two weeks of trading can hypothetically bring you
$1,000,000 out of $1,000 of initial investment.
This is certainly
hypothetically because many newbie traders deal with their trades as
gambling, that surely bring them to having nothing in the end. You
should always keep the phrase "be careful!" in your mind. This market
would give you its profit possibilities only if you learn the basic
things hard and make lots of demo trading.
The statistics is that
as much as 95% of traders come to losing their money at Forex, 5% have
profit, and less than 1% of traders make large fortune at Forex. You
should not produce, sell, or advertise anything trading at Forex. Your
assets are your knowledge, experience and a small amount of cash.
This
market is a platform for banks, transnational corporations, and
individual traders to change the currencies they possess into other
ones. This is the spot Forex market. In this market, you can trade with
up to 1:400 leverage. This means you will receive $400 (to your account)
for each dollar invested. Therefore, you can trade with the $400,000
sum having invested $1,000 onto your account.
Still, there are
lots of experienced traders who consider such leverage to be dangerous
and will not proceed forward. Nevertheless, if you know how to use such
high leverage, it will only do you good. However, this is the place to
stop speaking about the basic things. Keep reading these articles if you
want to be aware of how this market has occurred and some of its
historical matters.
Now it is time to speak about the strategies
and the way of making money at Forex some traders use. First, we should
say that the things that work in one case do not certainly work in
another. The fact is that currency trading surely means risk. Still,
there are a number of strategies for the newbie to use to be the winner.
Forex
trading may seem very easy but it is not. Your high today earnings may
turn into considerable losses even of your starting capital tomorrow.
Newbie traders are likely to make the same mistakes several times. Here
is a list of such typical mistakes.
1. There is no use of searching the "Holy Grail"
This
phrase is to think for those who are scared of losses or being too
greedy does his best to get rich in no time. You can surely make lots of
money some of the time and there isn't a necessity of producing and
advertising anything but a huge homework is required to learn first. You
have to know how this market works and which factors can take the
exchange rate up or down. You should also be aware of the effective
management for your money not to lose everything.
The majority of
traders starting at Forex, look for their ultimate strategy that will
cause no losses and will bring only profit. The desire of such people is
to make a strategy that guarantees stable profit and millions of
earnings in a short time without any losses for them to quit and enjoy
their fortune and the new huge house. This will never bring any success.
No
strategy will give you only profit and such research is only waste of
time. High profits of trading are caused by high risk, and you will not
earn a fortune without being on the knife-edge. Do not be sure that
every trade will close in advantage to you. You will always feel
uncertain and there is no way to vanish it. It means that you should
always be ready to the possibility of your strategy failing even if it
is thought as perfect.
You will save a plenty of time and nerves
by avoiding the search for the perfect strategy of earning millions.
Even if you find this strategy, you will not ever need it. You will see
why later.
2. Apply fundamental and technical analysis.
At
the beginning of my trading, I relied only on the money management on
which I wanted to base my strategy and saw no sense of these analyses.
However, money management, which is still very important, does not worth
omitting them. You can forecast the direction of the market basing on
your technical and fundamental strategies to see their effectiveness.
You'll
be able to make forecasts of price movements by applying the past data
of the prices and graphs to the technical analysis methods. You can
predict future prices with the level of accuracy dependent on your
technical analysis skills using the graphs of the rates you observe.
Trading
with some brokers you can see technical indicators along with the
graphs. You can apply it to your demo account and estimate your
prediction skills necessary for planning trading decisions.
It is
impossible to choose the most effective indicator among lots of various
ones. Each trader has to decide for himself which indicator is best for
him. You cannot find any magic formula; you just see the graphs, make
your forecasts and find out whether they come true seeing the values in
the news later.
Your decisions form this formula along with your
knowledge that occurs out of the practical experience. Starting trading
with an online broker it is best for you to trade with yourself on the
sheet of paper rather than invest real money at once.
There are
many technical analysis indicators available but here are the ones that
are the most widespread: the Moving Average Convergence Divergence
(MACD), the Bollinger Bands, Pivot Points, RSI, Stochastic, Fibonacci,
EMA, and Elliot Waves.
The broker's software will automatically
make all the necessary calculations when you add the technical analysis
indicator to the graph so that you will see some facts, which are
unavailable without using these indicators. It is even possible for you
to build your own technical systems basing on these indicators.
Fundamental analysis is another tool that maximizes your profit and
minimizes your losses on the trades. Some traders prefer only one kind,
but the majority prefers both.
Fundamental analysis means trading
following the news (e.g. telling about the economies or unemployment
rate) in the countries of the currencies you trade. They can also tell
about the events that can have a strong influence on the currencies'
exchange rate.
You can make forecasts on the market direction by
following the news as well. That is why various trading software of the
brokers like www.oanda.com offer a link to the page containing important
news.
3. Use the strategies of money management.
Money
management strategies let you win or lose. You should use them to be in
a profit. Many traders make too vast investments in every trade and
this is not always rational and reminds of a saying: "Expect to make too
much and you will make too little, expect to make little and you will
make a lot." It means that even if you invest much trying to get a lot
on every trade you can lose all and even if you make small investments
looking for a small reward you can make a lot in some period.
1%
of the total sum of your account is the maximum sum of the potential
risk. This is the first rule of the money management. Stop loss and
limit orders may help you to follow this rule. This may be the reason of
the small profit, especially if you have small initial investments.
However, by compounding a part of your profit or the entire amount, you
can get an exponentially growing income.
This strategy of compound
profits is the one that helped to make millions on financial market
instead of gambling that results in losing all investments quickly.
Here
is the example of the opposite tactics that many traders follow.
Imagine that you have an initial investment of $5,000. You are lucky to
possess the trading account and you enter a $1,000 trade. In case the
market trends down and you lose your $1,000, then your assets become
$4,000. Keep following your strategy and enter a $1,500 trade. Just make
sure the market is at its low and remain hopeful that you get your
$1,000 back on top of an earned extra $500. Then the market keeps moving
against you leaving you with $2,500 on your account, which is only
one-half of your starting capital. This is a very difficult situation to
recover from.
