Online Forex Guide

Guide to Forex - The Thrill in Trading

Foreign exchange (Forex, FX) trading is today the largest financial market in the world. With an estimated daily turn-over value of over four trillion dollars ($4T), NYSE’s fifty billion ($50B) is loose change. Forex trading exceeds all other trading markets combined, including commodities, futures, bonds or securities and others, being traded in almost any country and by almost anyone with access to the Internet. Continue to read in our guides to get more information about the forex market.

How trading works - Quick Forex Guide

Currency trading is actually trading in its simplest method buying and selling except that the commodity being bought and sold is currency or money. One is bought or sold the base currency using another currency the quote currency. Therefore, trading is always done in pairs, and the most common traded are the currencies of countries with stable economies such as the US dollar, the British pound, the Japanese yen, and the euro. The Swiss franc, Australian, New Zealand and Canadian dollars are also traded extensively. Read more in our specific forex guides.

The buying and selling of currencies is made possible by the fluctuations in value of one currency against another. When the price of one is low, buying can be made, and when the price rises, then it is sold. The difference is the profit. Conversely, if the price of the bought currency falls instead, then loss is sustained. It is simple enough in theory, but very complicated in practice.

Why currency values fluctuate

There are several reasons a currency’s price changes. One is the buying and selling of commodities. When a businessman wants to buy goods in a foreign country, he will need to purchase that country’s currency for him to do so. Large demand of that currency may raise its relative price, and low demand may lower it. That is why balance of trade is so important in the economy of a country.

Another reason is speculation. Currency buyers may suddenly purchase large volumes of a currency to raise its price, then suddenly dump what they bought when the price is high enough, causing a sudden fall. Or traders may float a rumor or break some news that will strengthen a country’s currency value like oil being discovered, or gold mine opened. Such developments add to a nation’s wealth, and its currency rises in value. Then the bubble bursts and ruins those who bought at high prices expecting the price will rise further.

Forex trading advantages

Forex trading offers some advantages over other kinds such as equity trading or the stock exchange. For one the initial capital is very low: $300.00 plus $50.00 deposit per lot to trade for a mini account. That $350.00 in the stock exchange can only buy a few stocks not worth the trip to the bourse, but in Forex trading, with a leverage of 100:1, the same $300.00 can put into the market $30,000, opening a tremendous opportunity to profit from a slight movement of the market. And, of course, a great chance to lose one’s life savings as well.

Another advantage is the leverage level. Only Forex trading can offer such great leverage amounts, not equity trading (2:1), nor commodity futures (15:1 max), or any other. This leverage level the opportunity to play with real money is what attracts many newbie and amateur traders like moths to a flame. And many do get burned.

The third may be market volatility: the price of any currency may fluctuate several times a day, sometimes in dizzying ranges of ups and downs. The volatility to spread ratio may be as high as 500:1, meaning the profit potential is 500 times one’s capital. This is very large compared to those of stock trading with 100:1 in the best of times.

Fourth may be accessibility. Forex trading was erstwhile dominated by large corporations and multinational banks, who kept the market to themselves, elbowing out any upstart. Today, anyone with a computer and a connection to the Web can play the market. No need to hold an office, hire a staff and get an elbow in the trading floor. No need to hobnob with the snobbish rich to keep in touch with the developments. No need to be seen in the ‘in’ places, spend on wardrobe and try to look successful on an empty pocketbook. All that is needed to trade foreign currencies today is a computer set, a set of tools and techniques, and a lot of guts. And while it does not guarantee success, it does give a player enough thrill and experience to last him a lifetime.

Forex day trading

Day trading is called such because trading is usually done within that single day. Stocks, futures, and a variety of products including currency are day traded. Formerly, it is only the finance corporations, investment firms and banks day trade, represented by specialist employees whose work is just that. However, day trading is done by almost everyone with access to the Internet, modern technology having brought it to the smallest office and room, so to speak.

There are many styles in day trading, which a day trader actively looks for. As in after-hours trading, a day trader may make numerous trades within his time span or none at all. Some practice quick-response trading, responding to quirks of the price, while others look for trends. Still others may bank on the momentum of price movements; but for some patterns can be discerned are reliable profit-makers. There is actually almost no end to techniques, tools and strategies a day trader can employ in his work, but of course what he relies on are those he feels comfortable with. They differ with every individual trader, but the desired end is the same all throughout: profit. And big, if possible.

Trading strategies

There are about six general trading methods practiced by many traders in their play. The first is trend following, which believes that it is profitable to follow a trend because it will continue for a sometime. Therefore a trend follower buys when a trend is established, and dumps the load when the trend begins to reverse. There are tools to help a player in this strategy, and they are quite easy to understand and use.

The second is contrarian, which is the exact opposite of trend following. It contends that a trend will be short and a reversal is always imminent. Tools are also available for this. The third is range trading. A ranger plays the range and buys at any low price when he sees that the price has reached support levels, and sells when the price is about to hit the resistance levels. All these are within a range wherein the price fluctuates in, unable to break out.

Next is scalping. This is quick trading, exploiting tiny price movements, buying and selling in minutes. Then there is rebate trading, which of course uses rebates as the profit to earn for the playing. It is definitely quite simple and almost risk-free.

Last is news playing, where the trader sells on bad news, and buys on the good. These playing techniques are used by many traders, who profit by them, and also lose once in a while. But nothing is perfect, and in the final analysis trading is done by men, who are inherently fallible and influenced by a lot of things at any time, even in times of trade. So they err, but they also hit it right. In foreign exchange trading, much of the time the profit does not matter; but the play does.