WHY FOREX TRADING?
Forex trading has been around for over 30 years but until the rise of the internet it was almost entirely in the hands of banks and other institutions with large investment funds. These days ordinary people can get involved although the financial institutions are still the major players. When I tell you that around US $4 trillion changes hands every day on the currency trading markets you will understand that only a small part of this belongs to ordinary people like you and me.
To get started you will need a high speed internet connection, a good system or the time to learn and develop your own system, and some money to invest.
You do not necessarily need a lot of money. Brokers now offer mini forex trading accounts and even micro forex trading accounts which you can open with just a couple hundred dollars. However, it is better to have more, even if you do not put it all into the account in the beginning. Forex trading is risky and if you only have a couple hundred dollars, you probably should be doing something safer with it.
But assuming that you have the funds and you have decided that you want to make money with some kind of financial trading, let's take a look at why this could be a better option for you than stock or commodity trading.
1. No commissions and no fees.
If you have experience of the stock market you will know how your profits can be eaten away by brokers, exchange and even government fees. The global nature of the forex market means that you do not have to pay any of these. Brokers make their money through the spread, which is the difference between the bid and ask prices of a currency. All you have to do is be sure that the price will go your way far enough to cover this.
2. No fixed lot size.
In commodity futures markets, the size of a lot or contract is set by the exchange and you cannot buy or sell less than one lot. But in spot forex trading you can theoretically set your own lot size. Most brokers have their own standard sizes but you can shop around and look for a broker who offers small or fractional lots.
3. A 24 hour market, five days a week.
For the whole of the global business week, the forex market never sleeps. This is great if you need to trade outside of normal business hours. You can work at your day job from 9 to 5 and trade currencies in the evenings. Or you can start whenever you get up in the morning, even if it is 5 a.m.
4. High leverage.
Forex brokers may offer up to 200 times your margin deposit in leverage, although 100 times is more common. This means that you have the chance to make a lot of money from only a small deposited fund. You would only need $100 or even $50 to control $10,000 dollars in a trade. As long as you have good risk management and remember that high leverage also means high risk, this can open up the possibility of a high return on your investment.
5. A massive market with high liquidity.
The forex market is so huge that even the banks, big as they are, each have limited influence. Insider trading is not an issue. And high liquidity means plenty of money in the markets so that you are never stuck unable to close a trade. You can even set software to close your position for you at a certain level of loss or profit.
6. Free tools and information from your broker.
Brokers are in strong competition with each other to attract retail traders so they are offering more and more features. We will look at how to choose your broker in a later section. They will offer you a demo account where you can practice your trading, sharpen your skills and try out or even develop your own system before you start to use real money. They will also provide the charts that you need to identify trends, and give you access to breaking forex news, all for free.
7. Low start up costs.
A good modern computer with a high speed internet connection is all that is needed to begin trading currencies. If you want to use a robot for your trading you can find one for $100 to $200. Plenty of information on trading currencies including advice on systems is available for free online.
8. You are in control.
As a forex trader you will be in full control of your investment. You can access your account through your broker’s software platform and make the trades in real time yourself.
You also have control over the currencies that you buy and sell. You are not limited to dealing in your own country's currency. This means that if your national economy is in a very unpredictable state you can switch to trading two other currencies that are more stable.
So there are 8 good reasons to choose forex over other forms of financial trading. Now let’s move on to the basic information that you need to be familiar with so that you can start trading.
2. Trading Basics
MAKING SENSE OF QUOTES AND PAIRS
When you see a forex price quote, it will always involve two currencies. That is because all currency transactions are exchanges: you are buying one currency and selling another at the same time.
In theory you could trade any two currencies of the world, but most trading involves the currencies of the larger financial powers. This does not necessarily mean the biggest or most politically powerful countries. Switzerland is only a small country but it is a major player in the financial markets because of the global importance of the Swiss banks.
There are 6 major forex pairs which together account for 90% of the funds traded on the forex markets. These are:
- EUR/USD: the euro and US dollar.
- GBP/USD: the British pound and US dollar.
- USD/JPY: the US dollar and Japanese yen.
- USD/CHF: the US dollar and Swiss franc.
- AUD/USD: the Australian dollar and US dollar.
- USD/CAD: the US dollar and Canadian dollar.
The US dollar is involved in 85% of forex trades and therefore it is in all of the major pairs. Pairs that do not involve USD, such as EUR/GBP, are called cross rates.
The Best Pair For Beginners
The best currency pair for most beginners to trade is EUR/USD. There are two reasons for choosing this pair:
1. It is the most commonly traded pair so liquidity is high and the spread (your cost) is generally low.
2. There is plenty of information available about both currencies. Brokers will supply full charts and it is easy to access financial news and alerts.
The second most traded pair is GBP/USD.
You may have access to a particular system that works with another pair. That is fine, but try to stay with only one pair when you are starting out. Do not follow a system that involves trading a lot of different currencies. It is too difficult to keep on top of all of the prices, trends and news.
Understanding A Forex Quote
The first thing to know about currency pairs is that they are always written in a certain order. The first currency is called the base currency and the second is called the quote currency.
Here is an example of a foreign exchange rate for the euro against the US dollar:
EUR/USD 1.3642 1.3644
The base currency is the euro and the quote currency is the dollar.
There are two prices given. The first is the bid price, which tells you how many units of the quote currency (USD) you will get when you sell one unit of the base currency (EUR). In this example you get 1.3642 dollars when you sell 1 euro.
The second price is the ask price, which tells you how many units of the quote currency (USD) you have to pay to buy one unit of the base currency (EUR). In this example you have to give 1.3644 US dollars to get 1 euro.
If you buy the EUR/USD pair you are buying euros and giving dollars. Buying is called ‘going long’ or ‘taking a long position’.
If you sell EUR/USD you are selling euros and getting dollars. Selling is called ‘going short’ or ‘taking a short position’.
This is the way that traders refer to their transactions. They never talk about ‘exchanging euros for dollars’. Instead they will talk about ‘selling EUR/USD’, or ‘going short on EUR/USD’.
You buy the pair when you believe the base currency (EUR) will increase in value relative to the quote currency (USD). You would sell the pair if you think the base currency will decrease in value relative to the quote currency.
Often you will see rates quoted online with just one price given. The second price will vary from broker to broker depending on their spread. Let’s look at that next.
Forex trading has been around for over 30 years but until the rise of the internet it was almost entirely in the hands of banks and other institutions with large investment funds. These days ordinary people can get involved although the financial institutions are still the major players. When I tell you that around US $4 trillion changes hands every day on the currency trading markets you will understand that only a small part of this belongs to ordinary people like you and me.
To get started you will need a high speed internet connection, a good system or the time to learn and develop your own system, and some money to invest.
You do not necessarily need a lot of money. Brokers now offer mini forex trading accounts and even micro forex trading accounts which you can open with just a couple hundred dollars. However, it is better to have more, even if you do not put it all into the account in the beginning. Forex trading is risky and if you only have a couple hundred dollars, you probably should be doing something safer with it.
But assuming that you have the funds and you have decided that you want to make money with some kind of financial trading, let's take a look at why this could be a better option for you than stock or commodity trading.
1. No commissions and no fees.
If you have experience of the stock market you will know how your profits can be eaten away by brokers, exchange and even government fees. The global nature of the forex market means that you do not have to pay any of these. Brokers make their money through the spread, which is the difference between the bid and ask prices of a currency. All you have to do is be sure that the price will go your way far enough to cover this.
2. No fixed lot size.
In commodity futures markets, the size of a lot or contract is set by the exchange and you cannot buy or sell less than one lot. But in spot forex trading you can theoretically set your own lot size. Most brokers have their own standard sizes but you can shop around and look for a broker who offers small or fractional lots.
3. A 24 hour market, five days a week.
For the whole of the global business week, the forex market never sleeps. This is great if you need to trade outside of normal business hours. You can work at your day job from 9 to 5 and trade currencies in the evenings. Or you can start whenever you get up in the morning, even if it is 5 a.m.
4. High leverage.
Forex brokers may offer up to 200 times your margin deposit in leverage, although 100 times is more common. This means that you have the chance to make a lot of money from only a small deposited fund. You would only need $100 or even $50 to control $10,000 dollars in a trade. As long as you have good risk management and remember that high leverage also means high risk, this can open up the possibility of a high return on your investment.
5. A massive market with high liquidity.
The forex market is so huge that even the banks, big as they are, each have limited influence. Insider trading is not an issue. And high liquidity means plenty of money in the markets so that you are never stuck unable to close a trade. You can even set software to close your position for you at a certain level of loss or profit.
6. Free tools and information from your broker.
Brokers are in strong competition with each other to attract retail traders so they are offering more and more features. We will look at how to choose your broker in a later section. They will offer you a demo account where you can practice your trading, sharpen your skills and try out or even develop your own system before you start to use real money. They will also provide the charts that you need to identify trends, and give you access to breaking forex news, all for free.
7. Low start up costs.
A good modern computer with a high speed internet connection is all that is needed to begin trading currencies. If you want to use a robot for your trading you can find one for $100 to $200. Plenty of information on trading currencies including advice on systems is available for free online.
8. You are in control.
As a forex trader you will be in full control of your investment. You can access your account through your broker’s software platform and make the trades in real time yourself.
You also have control over the currencies that you buy and sell. You are not limited to dealing in your own country's currency. This means that if your national economy is in a very unpredictable state you can switch to trading two other currencies that are more stable.
So there are 8 good reasons to choose forex over other forms of financial trading. Now let’s move on to the basic information that you need to be familiar with so that you can start trading.
2. Trading Basics
MAKING SENSE OF QUOTES AND PAIRS
When you see a forex price quote, it will always involve two currencies. That is because all currency transactions are exchanges: you are buying one currency and selling another at the same time.
In theory you could trade any two currencies of the world, but most trading involves the currencies of the larger financial powers. This does not necessarily mean the biggest or most politically powerful countries. Switzerland is only a small country but it is a major player in the financial markets because of the global importance of the Swiss banks.
There are 6 major forex pairs which together account for 90% of the funds traded on the forex markets. These are:
- EUR/USD: the euro and US dollar.
- GBP/USD: the British pound and US dollar.
- USD/JPY: the US dollar and Japanese yen.
- USD/CHF: the US dollar and Swiss franc.
- AUD/USD: the Australian dollar and US dollar.
- USD/CAD: the US dollar and Canadian dollar.
The US dollar is involved in 85% of forex trades and therefore it is in all of the major pairs. Pairs that do not involve USD, such as EUR/GBP, are called cross rates.
The Best Pair For Beginners
The best currency pair for most beginners to trade is EUR/USD. There are two reasons for choosing this pair:
1. It is the most commonly traded pair so liquidity is high and the spread (your cost) is generally low.
2. There is plenty of information available about both currencies. Brokers will supply full charts and it is easy to access financial news and alerts.
The second most traded pair is GBP/USD.
You may have access to a particular system that works with another pair. That is fine, but try to stay with only one pair when you are starting out. Do not follow a system that involves trading a lot of different currencies. It is too difficult to keep on top of all of the prices, trends and news.
Understanding A Forex Quote
The first thing to know about currency pairs is that they are always written in a certain order. The first currency is called the base currency and the second is called the quote currency.
Here is an example of a foreign exchange rate for the euro against the US dollar:
EUR/USD 1.3642 1.3644
The base currency is the euro and the quote currency is the dollar.
There are two prices given. The first is the bid price, which tells you how many units of the quote currency (USD) you will get when you sell one unit of the base currency (EUR). In this example you get 1.3642 dollars when you sell 1 euro.
The second price is the ask price, which tells you how many units of the quote currency (USD) you have to pay to buy one unit of the base currency (EUR). In this example you have to give 1.3644 US dollars to get 1 euro.
If you buy the EUR/USD pair you are buying euros and giving dollars. Buying is called ‘going long’ or ‘taking a long position’.
If you sell EUR/USD you are selling euros and getting dollars. Selling is called ‘going short’ or ‘taking a short position’.
This is the way that traders refer to their transactions. They never talk about ‘exchanging euros for dollars’. Instead they will talk about ‘selling EUR/USD’, or ‘going short on EUR/USD’.
You buy the pair when you believe the base currency (EUR) will increase in value relative to the quote currency (USD). You would sell the pair if you think the base currency will decrease in value relative to the quote currency.
Often you will see rates quoted online with just one price given. The second price will vary from broker to broker depending on their spread. Let’s look at that next.
