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The Good and the Bad The currency market is also the only market that is truly open 24 hours a day with decent liquidity throughout the day. For traders who may have a day job or just a busy schedule, it is an optimal market to trade in. As you can see from the chart below, the major trading hubs are spread throughout many different time zones, eliminating the need to wait for an opening or closing bell. As the U.S. trading closes, other markets in the East are opening, making it possible to trade at any time during the day.
While the forex market may offer more excitement to the investor, the risks are also higher in comparison to trading equities. The ultra-high leverage of the forex market means that huge gains can quickly turn to damaging losses and can wipe out the majority of your account in a matter of minutes. This is important for all new traders to understand, because in the forex market – due to the large amount of money involved and the number of players – traders will react quickly to information released into the market, leading to sharp moves in the price of the currency pair. Though currencies don’t tend to move as sharply as equities on a percentage basis (where a company’s stock can lose a large portion of its value in a matter of minutes after a bad announcement), it is the leverage in the spot market that creates the volatility. For example, if you are using 100:1 leverage on $1,000 invested, you control $100,000 in capital. If you put $100,000 into a currency and the currency’s price moves 1% against you, the value of the capital will have decreased to $99,000 – a loss of $1,000, or all of your invested capital, representing a 100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the stock’s value on a $1,000 investment, would only mean a loss of $10. Therefore, it is important to take into account the risks involved in the forex market before diving in. The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired. Furthermore, in a declining market, it is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. On the other hand, forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position – as they are in the equities market. Due to the extreme liquidity of the forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%. Furthermore, commissions in the equities market are much higher than in the forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for the transaction.  What Is Forex? The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of April 2004, the Bank for International Settlements (BIS) reported that the forex market traded U.S. $1,900 billion per day.) One unique aspect of this international market is that there is no central marketplace forآ foreign exchange. Rather,آ currency tradingآ is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney – across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly. Spot Market and the Forwards and Futures Markets What is the spot market? What are the forwards and futures markets? In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement. Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. (For a more in-depth introduction to futures, see Futures Fundamentals.) Note that you’ll see the terms: FX, forex, foreign-exchange market and currency market. These terms are synonymous and all refer to the forex market. The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently,آ forex trading in theآ currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts. Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. In the retail forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful forآ currency traders. Extreme liquidity and the availability of high leverage have helped to spur the market’s rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will. The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements. The goal ofآ this forex tutorialآ is to provide a foundation for investors or traders who are new to theآ foreign currencyآ markets. We’ll cover the basics ofآ exchange rates,آ the market’sآ history and the key concepts you need to understand in order to be able to participate in this market. We’ll also venture into how to start trading foreign currencies and the different types of strategies that can be employed. article from investopedia
Then if the market continues to move against them, they move out to the hourly chart to look for a reason to stay in the trade. As the market continues to move against them, they shift to the daily chart to hope to find a reason to stay in the trade. The next step is to get a margin call because they have no funds left to maintain their position. Of course, the main issue here is that they were looking for a way to stay in a losing trade rather than closing it out at a small loss. Taking a loss does not mean that you do not know what you are doing. Too many new traders think that losing a trade means that they are losers or that they aren’t smart enough to trade. Nothing could be further from the truth though. Professional traders understand that if they trade, they will have losing trades. That is really the only guarantee in the field of speculation. How you handle those losing trades has as much to do with your success as a trader as any other factor. You don’t have to like losing, but you must accept the fact that all trades cannot be winning trades. You have to keep those losing trades small enough to be able to make up for them with your winning trades. Switching time frames to justify staying in a trade is not how you keep your losses small. Identify your exit point before you get into the trade and stick to it. Judge yourself from month to month rather than on every pip move in the market. Be consistent in your approach and stay in one time frame from the beginning of the trade to the end of the trade. article from golearnforex
For the inexperienced, FOREX trading involves buying and selling the different currencies of the world. A FOREX deal is made when one buys one currency and sells another at the same time. It is always traded in pairs, Euro/USD, CHF/USD, USD/JPY…you get â€کshort’ in a currency every time to buy another and the profit is made when you buy-low and sell-high. Facts about foreign currency exchange marketFOREX market is the largest trading market in the world. It yields an average turnover of $1.9 trillion daily and the figure is nearly 30 times larger than the total volume of equity trades in United States. FOREX trading is very unique as the trades are done between two counterparts via electronic network or telephone connections. There is no centralized location as stocks or futures markets and trades are done around the clock. Everyday FOREX trade begins when the financial centers in Sydney start their day, and moves around the globe to Tokyo, London, and then New York. Traders can always response to the market regardless of the local time. Although FOREX trading involves such a big volume of trades nowadays, it is not made available for the publics until year 1998. In the past, the FOREX market was not offered to small speculators or individual traders due to the large minimum business sizes and extremely strict financial requirements. At that time, only banks, big multi-national cooperation and major currency dealers were able to take advantage of the currency exchange market’s extraordinary liquidity andآ strong trending nature of world’s main currency exchange rates. Only until the late 90s (year 1998), FOREX brokers are allowed to break huge sized inter-bank units into smaller units and offer these units to individual traders like you and me. Nowadays with the rapid growth of Internet and communications technology, FOREX trading has become one of the hottest make-money-at-home-businesses for those who wish to avoid conventional 9-5 day job.آ As a fact in FOREX trading, FOREX is mainly traded in large international bank. According to Wall Street Journal Europe, 73% of the trade volume is covered by the major ten.آ Deutsche Bank, topping the table, had covered 17% of the total currency trades; followed by UBS in the second and Citi Group in third; taking 12.5% and 7.5% of the market.آ Other large financial cooperation in the list is HSBC, Barclays, Merril Lynch, J. P. Morgan Chase, Coldman Sachs, ABN Amro, and Morgan Stanley. For market participants segment, approximately half of the transactions done were strictly between dealers (i.e. Bank, or large currency dealer); others are mainly between dealer and non financial institutions. Why FOREX trading?There are several reasons why FOREX had became such a popular investment among world wide speculators. In FOREX trading, you can always use technology for your own advantage. The FOREX market has made an amazing transformation since the advent of the internet. Technology has now made it possible for smaller investors to play on the same level as larger corporations and banks. Anyone with a computer and a will to succeed can start trading currencies from the privacy of their home or office. Online FOREX trading has changed the way that investors do business. With access to your portfolio 24-hours a day, it is really very simple to get started. You can choose whether to hire a professional to handle your transactions, or you could choose to do them yourself. Also, FOREX trading provides relative large leverage rates to individual traders. FOREX traders can do business with up to 200 to 1 leverage rates. With this advantage, ROI is escalated dramatically and traders can always start up small with capital as little as $1,000. Getting started in FOREX tradingYou don’t need much to get started with FOREX trading. A computer with Internet access, a funded FOREX account with foreign currency exchange broker, and a trading system should be sufficient to get things started. To reduce the risks of losing money, some basic charting knowledge is as well recommended before you start trading FOREX. FOREX charts assist the investor by providing a visual representation of exchange rate fluctuations. Many variables affect currency exchange rates, such as interest rates, bank policies, geopolitics, and even the time of day may affect exchange rates. As stated by expert FOREX trader Peter Bain, charting is an essential tool in FOREX trading. In his newsletter, he reveals that daily charts, hourly charts, and 15-minute charts are used while trading in FOREX. As quoted from his informative newsletter — “Daily chart will help you define the overall trend from a position trading point-of-view, and the hourly (one hour) chart will give you a feel for the intraday trend.آ The 15-minute chart is used for entry and exit – with assistance from the five-minute chart, where price is moving quickly, and you need to be closer to the action.†Being one of the technical method, FOREX charting is based on the principal â€کhistory repeats itself’. FOREX traders who study charts predict the market future by evaluating past market performance. The time frame used for charting might differs for different traders, some analyze the past one week, some prefer six months analysis, and there are also traders who analyze the market for the past five to ten years before getting involved in a FOREX trade.آ A huge variety of FOREX charts are available in the market. Some charting methods are very simple, using a few FOREX indicators to show trading direction; other charts may include up to forty indicators and those are mainly for advance traders that are more skillful. MACD Divergence, RSI, RSI range, and price are some of the well known indicators in charting. Avoid unnecessary risksChoosing the right FX dealer is a way to avoid unnecessary risks. FOREX dealers are not all regulated the same way. Although FOREX dealers must be regulated by law, firms and individuals can solicit retail accounts for FOREX dealers and manage those accounts without being regulated. As a trader you should take up the responsibility of finding out if your FOREX dealers are regulated. If they are not, you may be exposed to additional risks. Also, beware of dealers with investment schemes that sounds too good to be true. Pay extra cautions to dealers that you first knew and always look into the investment offers. If you are from United States, you can always refer to CFTF (at http://www.cftc.gov) or NFA (at http://www.nfa.org) for further information. ConclusionsYou come to this article probably because of you are new to FOREX and were looking for some readings on the Internet. To be frank, FOREX can be very profitable but the risk lie beneath is equally great. Remember to always trade with proper investment plan and strategy. Read books, attend courses, watch video seminars, read papers, or even practice first with a dealer’s demo account to get yourself ready. Trade smartly, and gain the maximum out of FOREX – good luck! |
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