FOREX TRADING EXPLAINED
The forex market (short for foreign exchange), was established in 1971 as an inter-bank or inter-dealer market.
Since that time, it has undergone tremendous growth and now foreign currencies are actively traded from home computers. Simply put,
foreign exchange is the changing of one currency into another. You can buy and sell foreign currencies in all market conditions.
Forex is the single biggest financial market in the world. It literally dwarfs all other markets combined trading around
$2 trillion per day! By comparison, the US Treasury Bond market averages about $300 billion per day in trading volume, and the US
stock market will do about $10 billion per day.
There is no centralized market location like there is in the stock market or futures market. Instead, forex markets are traded
mostly over computer terminals. Also, unlike traditional markets, forex markets trade 24/7 around the globe and with the trading
volumes noted above, the liquidity is near perfect.
The forex markets move up and down due to economic, political and psychological factors. There is generally lots of movement
every single day in the major currencies that offer excellent trading opportunities for the speculator. Because the margin requirements
are extremely small, tremendous leverage is available. Yet because of the extreme liquidity noted above, it is very easy to
control risk-for those that understand the vital importance of money management. These 2 factors of leverage and easy risk control
are what make the forex markets such a great opportunity. However, please note that without proper risk management, this high
degree of leverage can lead to large losses as well as gains.
HOW DOES FOREX TRADING WORK ?
There are 2 types of accounts, standard and mini. In a standard account, 1 contract, or lot, controls
$100,000 of currency with a margin requirement of $1000 and therefore has a leverage of 100:1. A mini account controls
$10,000 worth of currency with a margin requirement of just $50 for a leverage of 200:1. Please note, leverage can lead
to large losses as well as gains, so it's critical to understand and implement effective risk controls.
The forex always trades in currency pairs. The first currency is known as the base currency and the second currency is known as
the cross. We are always trading the base.
Suppose you think the US dollar is going to fall against the Euro. This currency pair is quoted as
EUR/USD. Say it is showing a price of 1.2400. This means that 1 Euro will buy 1.24 US Dollars. If we think the Euro will
increase against the US Dollar, then we would look to buy this currency pair. The minimum price increment is 1 point, or
"pip". In the case of the EUR/USD, 1 pip on a mini account = $1.00 US, and for a standard account, it's $10.00 US.
Therefore in our example if we had bought the EUR/USD at 1.2400 and it went up to a price of 1.2500, we would make 100 pips,
or $100 in a mini account or $1000 in a standard account.
Of course leverage works both ways, so it's critical to understand and implement effective risk controls.
WHY FOREX TRADING ?
There are some huge advantages in trading the forex markets vs. futures or stock markets. First,
with the forex you get 24 hour liquidity, and as noted above, these are the most liquid markets available anywhere.
Second, with most trading platforms you get free real time quotes and charts. Also, because there is no centralized market location
or exchange such as with stocks or futures, there are no exchange fees to pay.
Another very comforting advantage that forex trading has over futures and stocks is that there is no debit risk. That's because
if a client were to be in an open loss position that exceeded his margin requirement, the trading platform will automatically liquidate
the position.
If there was a catastrophic event, you can never lose more money that what you have in your account.
And how about this - if you choose to trade the forex markets on your own, there are no commission charges! There is just the bid
and ask spread (as in any market) for the market makers, with the difference being that in the forex markets these bid/ask spreads
are very small.
Something to also consider is that in trading with most broker dealers, you get more consistent pricing options. Not so in either
the stock or futures markets, where the slippage can be substantial. Furthermore, please note that in the forex markets, we can sell
short the market just as easily as buying. It makes absolutely no difference - they're both executed at just the click of a
button. Because the margin requirements are extremely small, tremendous leverage is available. These 2 factors of leverage
and easy risk control are what make the forex markets such a great opportunity. Please remember that without proper risk management,
this high degree of leverage can lead to large losses as well as gains.
If you've every had any experience trading stocks or commodities, you know that these above-noted differences are very, very
significant.
The above information should give you a good idea as to what the forex markets are. However to trade profitably, you need to
learn how to properly analyze the markets so that you can achieve consistent success. In my opinion, the Peter Bain ForexMentor
course is second to none and is definitely worth the time to explore further.
[ Article 1- Consistency In Risk Control ] [ Article 2 - Consistent Execution ] [ Article 3 - Are you Consistently Inconsistent ? ] [ Article 4 - How To Approach The Trading Day Like A Pro ] [ Article 4 - Part 2 ] [ Article 5 - Using MACD In Determining Trend Direction ] [ Article 6 - Using MACD Divergence In Your Trading ] [ Risk Disclosure ] [ Testimonial Disclosure ]
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