What Are Some Forex Trading Basics?

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The smart thing for beginning Forex traders to do would be to start with Forex trading basics. By starting with the basics you’ll create a solid foundation upon which to build your Forex knowledge, Forex trading skill, and success as a Forex trader.

Forex trading is speculation – The first thing that anyone who wants to trade Forex needs to understand is that Forex trading is speculation. Speculation entails entering into financial transactions in an effort to profit from short or medium term price movement. The one key factor to remember about speculation is that there are no guarantees. This means that just because you trade Forex does not mean that you are guaranteed to make a profit. Speculation also implies that there is risk involved.

Please note that just because I mentioned that speculation is risky that I do not mean to discourage you from trading in the Forex market. I mention this because the risks involved in Forex trading aren’t mentioned nearly enough. This has caused some beginning traders to enter the market with the bad combination of high expectations and low preparation.

Forex trading can be extremely profitable – Just because we’ve spoken about Forex trading as speculation and that there is risk involved does not mean for one moment that Forex trading cannot be extremely profitable. There are many who have learned to trade successfully and some have done so well that they have gone on to become wealthy from trading Forex.

Forex broker selection – It is important to select the right Forex broker or brokers for your needs. One alternative is to rely upon a recommendation from a friend or associate. It is recommended though that you do your own due diligence to find out more about the reputation and financial standing of your chosen brokers. It is also not a bad idea to open more than one account and then place the same trades in each account simultaneously. While this may sound a bit ridiculous as you may suspect that the profit in each account will be the same, it’s best to actually test this out and see for yourself. The results will sometimes amaze you.

Forex can be simple, but not always easy – At first glance that statement might not make very much sense. If you think about it though, if Forex trading were so easy then why aren’t all Forex traders trading successfully? There’s more to trading than having all the right tools in place. Successful traders have the discipline to follow through and do what needs to be done. Trading discipline is one of the toughest things for beginning traders to master.

We just covered a few Forex trading basics. There’s obviously a lot more to successful Forex trading than the few basics that we have touched upon. To get closer to successful trading it is suggested that you learn Forex trading to increase your trading knowledge.

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What Are Some Good Forex Trading Tips?

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It seems most people who are starting out are looking for some good Forex trading tips to help them trade Forex more successfully.

Here’s a collection of excellent Forex tips to help you in your Forex trading:

Never trade without a trading plan – “Be prepared” is a phrase frequently attributed to the Boy Scouts. Being prepared is also essential for successful Forex trading. This means you should have a Forex trading plan before you place your very first trade. Many beginners are unfortunately prone to shortcuts and miss this crucially important step.

Never trade with money you cannot afford to lose – Money that you cannot afford to lose is often times in the Forex trading world referred to as, “scared money”. There is another saying in the industry that states, “scared money never profits”. Why is that you ask? I would say the scared money never profits because it is the type of money that a trader cannot afford to keep in their trading account. The scared money trader is more interested in what money they can pull out of the account than how they can grow the account. This type of trader will often bail at the first sign of a losing trade or two. This has the effect of causing the trader to stop trading and consequently when you stop trading you miss all future profit opportunities.

Learn Forex trading – This is one of my top tips for beginning Forex traders. It makes sense if you plan to master anything then you must be a student of that thing. Some traders, no matter how successful they get, still remain eager students of the markets. You can easily start with some basic Forex trading training like a Forex trading course. This will allow you to get some Forex trading basics under your belt and build a good base of trading knowledge for you.

Learn to be patient – As the old saying goes, “Rome was not built in a day”. The same is true of your Forex trading success. You will be much better off in the long run if you view your Forex trading journey as a marathon rather than a sprint.

Being patient will keep you from over trading and trying to, “force things to happen” rather than letting them happen naturally.

Have realistic expectations – Beginning traders are unfortunately the target of pie-in-the-sky, get rich quick scheme ads which post unrealistic and utterly ridiculous levels of return on investment. Let me set the record straight and save you some time and effort all in one fell swoop. There is no such thing as a Forex trading system with a 98% winning trade percentage. Also, don’t expect to get 1000% return per month on your initial investment. Neither of these is even remotely realistic and especially not for the low, low price of less than $100 as some ads would have you believe.

Exercise good risk control – If there is any phase of Forex trading which isn’t talked about enough it is risk control. If you ask any experienced trader what they thought about risk control they would probably ask you this simple question, “how can you possibly expect to control your reward if you don’t control your risk?”. By controlling your risk you place yourself in a position of profit when the market moves with you. Risk control also gives you the opportunity to, “fight another day” when the market happens to move against you.

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Smart Forex Trading Basics

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The lure of easy money brings many new traders into the Forex market. Forex trading can be very profitable, but it is a bit more complex than many of the “get-rich-quick” websites would have you believe.

Beginning traders make 2 common mistakes. These 2 mistakes are letting their emotions interfere with their trading and not having a trading strategy. You may be tempted to jump right into trading immediately after opening your account. It is easy to watch the market for a short time and believe that you now “know” where it is going to go next. Needless to say using the “shoot from the hip” trading method is a bad idea.

Successful Forex traders have a strategy or system that they use to profit and help minimize the affect that emotions can have on your trading.

Formulating your own strategy and knowing you market is all part of your ongoing Forex education. No matter which experience level you have achieved keeping informed about your market is always a good idea.

Understanding the Forex market and the factors which influence it should be your first step. Learn what successful Forex traders do and then follow in their footsteps as much as you can.

Traders, banks, corporations, investment funds, and governments are the five major groups that participate in the Forex market. Each of these has a set of guidelines and rules that they follow for trading successfully and each can be held accoountable for their trading actions. As an individual trader you are only accountable to yourself.

Basically if you don’t have a set of guidelines and rules you will find it difficult if not impossible to succeed. You rules and guidelines can come in the for of trading systems, strategies, and trading plans. After all, how can you get where your going if you don’t have any idea of how to get there?

Money Management

Money management has often been called THE key to trading successfully. It is unfortunately overlooked far too often and can multiply your profits exponentially. Trading without money management is like trying to save money without the benefit of compound interest.

Properly allocating the appropriate amount of your account equity can have a tremendous affect on your total returns.

One of the simplest things you can do put you on the road to successful trading is to control the amount of your equity you risk per trade. Keeping the amount risked at 1% to 3% is a good start. This gives you a good buffer and allows you to weather the inevitable drawdowns that are a part of all trading.

Using this percentage of equity method increases how many dollars you risk as your equity grows.
A successful trading system will increase the average dollar amount it makes per trade over time even though the percentage of money you risk per trade may stay the same.

The higher the percentage of your equity that you risk the more aggressive your trading becomes. Here is where you have to be very careful because as you do this your room for error decreases. For instance, if you risk 50% of your equity per trade you can only afford to be wrong 2 consecutive times. If you risk 2% of your equity per trade you could theoretically be wrong 50 consecutive times. Which position would you rather be in?

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How Do You Profit In Forex Trading – Part 3

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To put the above ideas in actual instance, let us say your observation and analysis brings you to think that the Euro will further go up against the U.S. dollar and you want to buy Euros in exchange for U.S. dollars, expecting the former to appreciate. You may elect to open a lot (100,000) and buy the Euros with it at a margin of 1%. If the exchange rate for EUR/USD is 1.25, you will in effect be buying 100,000 Euros at a price of 125,000 U.S. dollars. Since the margin is 1%, then the amount to be set aside in your account is 1% of 125,000, which is US$1,250. This means that your $US1,250 made you in control of 100,000 Euros. If your analysis is correct and the euro appreciated over the dollar, let us say, to 1.2550, then you will have earned 50 pips or $500. A pip is the tiniest price movement in a currency and more about this will be discussed in the next chapter. Should you decide to close the position, the deposit you previously made will go back to you and profits or losses you made will be credited to your account after calculations.

It is worthy to note that positions that are still open by the broker’s cut-off time equate to a rollover interest, which the trader will either pay or earn depending on his position. A borrowed currency would entail the trader to pay interest and a bought currency earns a trader interest. The cut-off time is usually at 5:00pm, Eastern Saving Time (EST). It would be better to close the account before the end of the trading day in order for the trader not to earn or pay interests. Your broker/dealer may be able to give you the specific details you need to know regarding rollover. Many brokers adjust their rates (rollover rates) depending on factors such as lending rates and account leverage. It would also be helpful for you to know that each currency is designated its own rate. U.S. dollar rate is .25%, Euros are 2%, Australian dollars are 4.25%, Japanese Yen are 0.10%, Swiss Francs are 0.5%, Canadian dollars are 1%, New Zealand dollars are 5% and the British Pounds are 1.5%.

If is highly advisable that traders do not go into trading with real money immediately. They may do some practicing by opening a demo account first before delving into the real world of forex. This demo account is free and allows the new trader to gain the full capabilities of a real account. Brokers offer these demo accounts for free to lure them to love the trade and eventually open a real account with them. It favors the brokers in terms of advertisement but it also favors the new trader since he manages to learn the ins and outs of forex trading without the actual risk. Any forex trading expert would advise a new trader to make use of these demo accounts before the real thing.

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How Do You Profit In Forex Trading – Part 2

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Another set of words to be remembered when trading currencies are the words “bid” and “ask.” The dealer’s “bid” is actually the price he is willing to pay to buy the base currency in exchange of the quote currency. It therefore means that the bid is the amount at which you will sell. On the other hand, the “ask” is the dealer’s price at which he will sell the base currency for the quote currency. The “ask” therefore is the amount at which you will buy. The difference between the two is called the “spread.” If you already start forex trading, you will see how user-friendly this bid and ask process is as formatted by the forex trading. All the trader needs to do is click on the icons when he decides to either bid or ask or buy or sell and he is well on his way to the next transaction.

Now one would ask where he/she will base what currencies to buy or sell. Forex trading is not a game of cards wherein a lot is based on luck. Decisions on whether to buy or sell currencies are based largely on what is happening in the economies of the nation where the currency involved came from. It also depends on many factors that have direct or indirect effects on a nation’s economy. It is therefore important to be aware of what is going on and be vigilant of updates and news around the world, or at least of the news about the country whose currency you want to trade with. It is wiser however to generally have a knowledge of what is going on in the world for what happens in one country may have a domino effect and thereby affect other countries. The current recession for example is not limited to certain nations only, but the whole world.

To illustrate again, let us use USD/JPY this time. The base currency in this example is the U.S. dollar and the quote currency is the Japanese yen. The U.S. dollar therefore is the basis for the buy and sell. It is important for the trader to study the current economic situations of these countries to wisely make the move of either buying or selling. If you, as the trader, think that the Japanese yen is going to weaken since the Japanese export industry needs help, then it would be a wise move to execute a BUY USD/JPY order. This means buying the dollars thinking that the value will appreciate over the yen. If, however, your analysis brought you to thinking that the Japanese investors are taking money from the U.S. market and turning the dollars into yen, thereby hurting the U.S. dollar, then you should execute a SELL USD/JPY order. This means selling your dollars expecting that the yen’s value will go down.

For new traders who have a capital that is not too big and want to buy currencies, but do not have enough money, is trading still possible for them? The answer is yes. This could be done via margin trading. Simply put, margin trading is trading with the use of borrowed capital. It is trading on credit. It is through this technique that a trader with as little as $1,000 can open positions worth $10,000 to $100,000. Margin trading is quantified according to “lots” in the forex market. A “lot” is the minimum price of the currency you need to buy. In forex trading, it is not usual to talk retail, as in buying 1 dollar or selling 1 euro. Forex transactions are done in “lots.” To analogize, you do not buy a couple of grapes, you buy them in bunches. We do not usually buy one or two eggs; we buy them by the dozen. That is how you will use a “lot” in forex. Depending on the account you have, a lot is 10,000 for a mini account and 100,000 for a standard account.

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How Do You Profit In Forex Trading – Part 1

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For those with experience in trading the stocks or futures, forex trading will be easy to understand. It is basically the buying or selling of currencies. The main goal in forex trading is to exchange or buy one currency for another currency, with the expectation that the price of the currency you bought or exchanged will have an increased value compared to the currency you sold or exchanged it with. That is how you make money from forex trading.

To illustrate, let us say for example that you bought 100,000 Euros at the EUR/USD exchange rate of 1.20. Then after a week, you exchange back those 100,000 Euros to dollar, this time at an increased rate of 1.25. EUR100,000 multiplied by 1.20 is US$120,000 and EUR100,000 multiplied by 1.25 is US$125,000. The difference between the two is your profit. If millions instead of hundreds of thousands are involved, then bigger profits are earned. Both rates 1.20 and 1.25 are the ratios of one currency over the other. Using the same example, it simply means that 1 euro can purchase 1.2 or 1.25 US dollars. This is just an example and it does not mean that these are the actual and present exchange rates of the two currencies.

You may ask why currencies are always quoted in pairs. This is because in every forex transaction, you buy one currency the very same time that you are selling another. Let us use another illustration, considering the sample “forex quote” we used above, EUR/USD=1.2500. The euro in this equation is called the “base currency.” The US dollar on the other hand is the “counter or quote currency.” If you will buy a currency given this example, the exchange rate dictates how much you need to pay in units of the quote currency (which is the dollar in this example) to purchase one unit of the base currency (the euro in this case). Therefore, you have to pay 1.25 U.S. dollars to purchase 1 euro. If you will be selling, the same principle applies. Only this time, again using the same example, the exchange rate dictates how many units of the quote currency (dollar) you will get if you will sell one unit of the base currency (euro). This means that you will have 1.25 U.S. dollars for every euro you sell.

The basis for buying and selling in a forex trading market is the “base currency.” If you say you will buy EUR/USD, it means you are buying the base currency (euro) and at the same time selling the quote currency (dollar). The base currency is also the basis of the trader’s movement in forex. If he thinks the base currency in a pair will go up, then it is a wise move to buy the pair. If, on the other hand, he thinks that the base currency will go down, then it is wise to sell the pair.

In forex trading lingo, two of the most important words to remember are “long” and “short.” “Long” and “buy,” as well as “short” and “sell” are respective synonyms. When you buy, it is already in your mind and in your expectation that the base currency will rise in value so that you could, in turn, sell it at a higher price. This is what the traders call taking a “long position” or “going long.” If selling, you expect the base currency to depreciate so that you could buy it back at a lower price. This now is what is called by traders as a “short position” or going short.

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