Basic Guide to Forex Trading
The foreign exchange currency trading market is undoubtedly the largest trading market in the world. It is much larger than the stock markets, bullion markets and also the commodities market for trading. Foreign exchange currency trading marketplace is buoyant and crowded as it has tremendous flexibility to leverage and also offers high liquidity to investors. With the average currency trading volume of about 2 two trillion dollars everyday, the forex market is miles ahead of any other similar trading market.
Forex currency trading market, just like any other market, has its own set of advantages as well as disadvantages. Among others, one of the main advantages of forex market is that it is open round the clock, five and a half days a week, except for Saturdays and Sundays. The trading hours, thus, are quite convenient for investors. Forex trading also offers other advantages like a high possible upside, high liquidity and almost zero entry or exit barriers.
Among disadvantages, the most critical one is the fact that this market is predominantly dominated by institutional buyers. So, as a retail investor, you do not really have a huge company. Also, retail players are devoid of much needed market intelligence to consistently make profit out of the Forex Market. The main players in the foreign exchange currency trading market world wide are financial behemoths and banks like Goldman Sachs, JP Morgan Chase, Citigroup, Deutsche Bank etc.
Traders have the option of trading foreign currencies at floating exchange system over the phone or by other better and affordable means of communication like, the World Wide Web. Almost all currency trading transactions are done on concept called margin. Trading on margin implies that the forex trader can trade even more than what the trader has in his account. The brokerage agency loans the trader the money to trade on margins. So if the trader has $5000 in his account and he wants to trade at 1% margin then you get a leverage of 100:1 and trade up to $500,000.
This makes foreign currency trading a high risk high gain game. While this allows as much as 100% rate of return, you hold equal chances of loosing your entire investment if the market goes against you. In the forex market, currencies are traded in pairs. This implies that you buy the stronger currency and sell of the weaker one that show chances of depreciation. The major currency pairs are US dollar vs. Japanese Yen, US dollar vs. European Pound, US dollar vs. Euro and US dollar vs. Swiss Franc.
Unlike the stock market, the forex market is free of commission payout, that is you do not pay any commission to any broker for any transaction. You just pay the spread or the difference between the actual price paid and the asked price. The smallest unit at which a pair is traded is called a pip. There are two kinds of traders-Technical and Fundamental. While Technical trading is driven by numbers, and is based on statistics and parameters, fundamental traders trade on calendar days i.e. big market events.
Excelling in currency trading requires both theoretical knowledgebase as well as hands of experience. Mock online trading platforms provide an opportunity to learn the tricks of the trade. You can select a brokerage agency and open a forex account with them. These currency trading accounts are called demo account. Your broker is the best guide who can help you use the demo account to learn the basic details about the forex market and start trading. If you can win profit using the demo account then there are high chances that you can secure a win while trading real stuff.
One of the most important components of foreign exchange currency trading is orders. There are different types of orders in the forex market. When the order is executed by the dealer thorough his intervention then it is called Manual Execution. Sometimes currency trading orders are executed through computer software, and they are called Automated Execution. This type of execution is used when online trading is performed.
Forex currency trading is a complex game, and involves various different kinds of trading options; spread over varying time frames. There are various kinds of trading options, and they cater to all kinds of trading budgets, risk appetites as well as time required. Currency trading in the forex market can be a matter of few minutes to as much as a couple of months. If you are trading for a very small period of time for small gains then this style is called scalping. This kind of trade involves multiple trading options on an intra day basis and is also called day trading. Swing Trading is linked to the market swings and profit gains vary from short to medium term swings in the market trend. Swing trading lasts for hours to days.
When a trader aims at long term gains from the forex market, then trades last for weeks to months. This kind of trading is called Position trading.
As apparent from the inherent trading styles, scalping or day trading involves a great about of intuition or gut feeling. Since the duration f such a trade is only a day or ever less than that, this kind of trading requires active involvement and supervision of the trader.
On the other hand, swing trading as well as position trading requires a through understanding of the world economic factors, and their possible repercussions on the currency rates. Currency values are a function of a number of factors- political, economic as well as geographical. Position trading generally requires a strong back office team that can handle analytics, and can theoretically predict the impact of macro economic factors on currencies.
Trading can also be discretionary and automated. When you are not trading though the internet then most of the trading decisions are taken by you after calculating the risks of gain or loss. When trade takes places through such a decision making process it is called Discretionary Trade. But while trading online most of the decisions are influenced by the computer and this is a common phenomenon in Automated Trade of currency trading.