A GUIDE FOR THE FOREX CURRENCY TRADING BEGINNER
For the Forex currency trading beginner a trade can be a little confusing until you break it down and come to grips with some of the trading terminology.
The purpose of any Forex trade is to swap one currency for another in the belief that the market will move and prices change such that the currency that you buy rises in value in relation to the currency which you sell.
The first important point is that each trade involves two currencies - the currency which you buy and the currency you sell. This gives us our first two important trading terms - the long position and the short position.
You take a long position when you buy a currency in the belief that it will rise in value and that you will able to sell at a profit.
If you sell a currency in the belief that it will fall in value you take a short position and hope to make a profit by buying it back again once the price has fallen.
The next important concept is that of the open and closed position. When you take a long position and buy a currency in the expectation that it will rise in value you open a position. When you later sell that currency to take you profit you close the position. The same is true when you take a short position and open that position by selling a currency in the expectation that it will fall in price and later close the position when you buy the currency back at the lower price.
Note: How does day trading work? You will often hear the term 'day trading' used and this confuses a lot of newcomers to the world of investing. When applied to forex trading, day trading simply means short-term trading effected by opening and closing trading positions within the same trading day, rather than running a trade over an extended period of time.
In Forex trading currencies are referred to by codes (developed by the International Organization for Standardization and known as ISO codes) such as USD for the US Dollar and GBP for the UK Pound. Prices for these currencies are quoted as either USD/GBP or GBP/USD with the first currency appearing in the quote being the base currency and the second currency being the counter or quote currency.
Here's an example quote to make things a bit easier to understand:
USD/GBP = 0.5260
In this case the US Dollar is the base currency and the UK Pound is the counter or quote currency. The base currency is always read as a single unit and so this quote means that it will cost 0.5260 UK Pounds to buy 1 US Dollar. Here's another quote:
GBP/USD = 1.9150
In this case it will cost 1.9150 US Dollars to buy 1 UK Pound.
In real world trading it's a bit more complicated as the market maker needs to add in his profit for selling you a currency or for buying currency from you. In reality therefore a quote might look more like this:
GBP/USD = 1.9238 1.9243
In this case the first figure is the 'sell' or 'ask' figure and the second is the 'buy' or 'bid' figure. The first figure is price at which a trader will sell the currency pair and the second is the price at which he will buy the pair. The difference between the two prices is known as the spread.
Prices are normally quoted to four decimal places and the fourth decimal place, which represents the smallest amount by which one currency can move against the other, is known as a 'pip'. In this case therefore the spread is 5 pips.
In our example therefore, if you wish to sell UK Pounds, the market maker will buy them from you at 1.9243 US Dollars per UK Pound and, if you wish to buy UK Pounds, 1 UK Pound will cost you 1.9238 US Dollars.
If you are just starting to learn Forex currency trading then this probably seems a little bit complicated but it represents the basis on which the Forex market operates and will quickly become second nature.
# What Is Day Trading?
We often hear the term 'day trading' today but just what is day trading?
In very simple terms a day trader buys and sells with a very short investment horizon which is typically measured in minutes with trading positions being opened and closed within the same trading day. Day trading is particularly suited to high volume, volatile markets such as the forex but is certainly not limited to currency trading. It is for example very commonly seen in the equity markets, although it tends to be seen on the more volatile exchanges such as the NASDAQ, rather than the NYSE or AMEX.
The principle is simply to spot an opportunity and then profit from it quickly getting in and out of the market with just enough time to make your profit and too little time to risk the market turning against you. For example, you might open a position at 11:00 am and close it out just a few minutes later at 11:07 am to take a small but quick profit and repeat this process as many as a hundred times in a single trading session.
Today this traditional definition has been widened somewhat and we now also refer to the practice of trading from home through an online broker as day trading. And, just to complicate matters, the term 'swing trading' has also started to appear recently to refer to traders with a slightly longer investment horizon of anywhere from one to five days.
Day trading in its truest form (buying and selling with a very short investment horizon) is a risky business and is not something which you should try unless you know exactly what you are doing as, while it can be very profitable, it can also produce very large losses very quickly.
Although we talk about 'investment horizons' it also needs to be understood that day trading is not the same as investing and you will be working to very short timeframes during which you will need to be glued to your computer screen jumping onto the wave of a trade as it gains momentum and the jumping off as it crests in order to ride the next wave. Spotting the waves as they roll in and knowing just when to jump on and jump off requires both skill and practice.
For those who enjoy the excitement of the roller coaster ride then day trading can be both exciting and profitable but it is not something for the novice forex trader and should only be contemplated once you have cut your teeth in the world of currency trading and gained a fair amount of experience.
How To Make Money In Foreign Exchange
The foreign exchange market is the world's largest trading market in which world currencies can be sold and bought and, while it has been in existence for many years, the market that we see now has been born out of substantial changes which took place in the 1970s when floating currencies and free exchange rates came into play.
There is no particular 'home' for the forex market and trading can be made from just about anywhere in the world, including using your own home computer. The trading market is also essentially open day and night because as the market is closing in one country the market in another country on the other side of the globe is opening. This means that you can trade at whatever time suits you whether it is during the afternoon or in the middle of the night. There will always be somebody somewhere who is happy to do business with you.
The secret when it comes to making money in foreign exchange trading is to start by learning the basics of the business and this means locating a high quality forex training course. It is not all that difficult to make money with foreign exchange, although you will certainly lose your shirt if you do not know what you are doing. Therefore, you must take the time necessary to learn what to do before you start and then must ensure that you spend a little bit of time working through a dummy trading account before you start trading with your own money.
When you do begin live trading start slowly and stay away from day trading until you are sure of your ground as this particular section of the market can be especially volatile and is influenced by numerous outside factors. As well, set yourself strict trading limits and do not go outside them. Put another way, do not trade with money that you cannot afford to lose because, while you will definitely make money, you will also encounter your fair share of loses while you get the hang of things.
And finally, ensure that you are using the best trading software available and do not be afraid to ask other people for help when you find that your are stuck!
The Importance Of Real Time Forex Charts
Trading in the foreign exchange market today means having a sound understanding of technical analysis and in particular an ability to keep track of currency pairs by learning the skill of reading live or real time forex charts. For the novice trader this also means finding a source of good online forex charts and, better still, free forex charts. Even better, if you can find yourself some free chart pattern recognition software for forex and learn how to use it you will be well on your way to trading with a fair degree of confidence.
Online forex charting conveys information about currency prices at specific time intervals ranging from as little as one minute up to several years and prices can be plotted either as simple line charts or as bar or candlestick charts showing price variations at specific time intervals.
Line charts are easy to read and give a broad overview of price movements which often allows you to clearly define patterns in price movements. By contrast, bar charts are not quite as easy to read but do provide far more information.
In simple terms the length of each bar on a bar chart indicates the price spread for a given period and the longer the bar the larger the variation between high and low prices. Opening and closing prices are shown on each bar so that you can see at a glance whether the price has risen or fallen and just what the variation in price has been. Although bar charts can be difficult to read, most chart pattern recognition software packages simplify the process of reading bar charts considerably.
Invented by the Japanese to analyze rice contracts, candlestick charts are similar to bar charts but are far easier to read as they are color-coded. For example, green candlesticks are used to show rising prices while red candlesticks show falling prices.
The beauty of candlestick charts is that the candlestick shapes when viewed in relation to one another form patterns many of which have been given names such as ‘Morning Star’ and ‘Dark Cloud Cover’ and once you learn to recognize these patterns it is an easy matter to identify trends in the market.
Although a real time forex chart can give you a great deal of information about a particular currency pair this is often supplemented using a number of technical indicators including trend, strength, volatility and cycle indicators all of which are used to predict both movements in the market and market volume.
The most commonly used Forex technical indicators include:
Average Directional Movement (ADX). ADX can be used to ascertain whether a market is approaching an upward or downward trend and how strong that trend is likely to be.
Moving Average Convergence/Divergence (MACD). MACD indicates the momentum of a market and the relationship between two moving averages.
Stochastic Oscillator. The stochastic oscillator shows the strength or weakness of a market by comparing closing prices to a price range over a period of time. A high stochastic will indicate that a currency is being overbought while a low stochastic will indicate that a currency is being oversold.
Relative Strength Indicator (RSI). RSI is a 100 point scale which shows the highest and lowest prices over a given time. When prices move above 70 a currency is considered to be overbought and when prices move below 30 a currency is considered to be oversold.
Moving Average. The moving average is simply the average price for a set time period when compared to other prices during similar time periods. For example, the moving average of closing prices over a 14 day time period would be equal to the sum of the 14 closing prices divided by 14.
Bollinger Bands. A Bollinger band consists of three lines - an upper and lower line indicating the range of price movement and a middle line showing the average price. When the market is volatile the gap between the upper and lower bands will widen and when a bar or candlestick crosses one of the bands it will indicate a currency which is either being overbought or being oversold.
# The Advantages Of Automated Forex Day Trading
An increasing number of people are being drawn to Forex trading in preference to the many other forms of investment available today and it is not hard to see why.
The Forex market is the largest trading market in the world with a steadily growing trading volume which has risen from some $500 billion dollars to $2 trillion in the last twenty years. It is also an incredibly liquid market which is not tied to any particular trading floor and operates around the clock across the world making it effectively a permanently open market. As one market closes another is opening and you can effectively follow the markets around the world as you trade and even all but eliminate the fact that the market in your home country will close for the weekend.
It is no wonder therefore that Forex trading attracts a wide and growing variety of both big and small traders each of whom enjoys a wide choice of trading strategies based upon the myriad of factors which affect foreign exchange rates. For many traders coming into the market it is the fact that there are so many different things that affect currency exchange rates which they find most attractive as it allows them to use a huge range of different tools when working in this extraordinarily exciting market.
Perhaps the greatest influence today however on the future growth of the market and its popularity lies in automation which has never been easier to accomplish and which brings with it many more advantages than disadvantages.
Automated Forex trading allows trades to be conducted in real time anywhere in the world and virtually eliminates the losses so often seen in manual systems which are trying to operate in such a fast moving and volatile environment. Anyone who has traded using a manual system will know only too well the frustration of a row of losses caused by nothing more than a simple time delay in buying and selling and will appreciate the value of automated currency trading.
Automatic Forex trading also brings with it the ability to operate in a wide range of different currency markets at the same time without any regard for the time zones of the markets concerned. If you are sitting in the United States at 2 o'clock in the morning then automatic trading allows you to conduct business with traders on the other side of the globe in several different countries all at the same time with ease.
One problem for many traders is that of risk management and this too is reduced as we move to automatic Forex trading. Manual systems often leave traders nervous about whether or not payment will be made after the completion of a trade but as payments can now be synchronized in real time this is far less likely. Indeed, as the automated trading system continues to develop it is clear that the settlement system will also be updated and such risks are likely to be all but eliminated in the near future.
Computer technology has advanced by leaps and bounds over the past few years and will continue to do so for many years to come. More importantly, access to that technology easily and cheaply from the comfort of our own homes and now the ability to access the best mini Forex fully automated trading means that we can all now manage our own investments with ease. For those in the currency trading world automated Forex day trading will certainly come as a welcome addition to an already great investment vehicle.
# The Importance Of Selecting The Best Forex Training
The Forex market is fun and lucrative although it is also highly competitive and volatile and anybody who wants to join in the fun will have to locate the best Forex training course available.
Any basic Forex trading course will incorporate a number of different components of trading including trading processes, concepts and terminology that are all necessary to give the beginner confidence as he ventures into the marketplace for the first time. The best Forex training will also focus particular attention on the size of the market and volume of trading and prepare the beginner to think on his feet and to take quick and accurate decisions.
Novice traders will need to learn things like the different orders placed in selling and buying, margins, bids, rollover and leverage. He will also need to be aware of the psychology of trading and the need for patience, stress management, commitment, discipline and much more. In addition, the novice trader must master the skills of market analysis and need to gain a clear understanding of technical and fundamental analysis and acquire the skills of creating and reading Forex charts.
A knowledge of the history of Forex trading is yet another important element of any Forex trading training, in spite of the fact that it is generally overlooked altogether or covered merely in passing. However, a clear knowledge of the background of the market combined with an understanding of a lot of the mistakes made as the market has grown is extremely useful in helping to establish a trading strategy.
Luckily there are many ways to study Forex trading today and novice traders are spoilt for choice. However, this is of course both good and bad and makes picking the method which is best for you somewhat difficult.
Like many things the starting point for many people is going to be a book or two on Forex trading and this is certainly a very good place to start as it is relatively inexpensive and will normally assist considerably when it come to deciding whether Forex trading is really right for you. However, although this will provide you with an excellent introduction, you will want some type of more personal training before starting to trade and this means attending seminars, enrolling for a Forex training class locally, taking a Forex training vacation or opting for one of the numerous online Forex training courses.
Regardless of the route you decide to select you have to do your homework carefully and consider exactly what you will be getting for your money. There are many excellent free Forex training courses available but you will need to pay for really good training and this is one investment that you must make and the expense of your training will certainly be worth it in the end. However not all training course are the same and some will provide you with much more value than others. If you can seek out the opinions of trusted friends and colleagues about their opinion of what is the proven best Forex training and, where this is not possible, then shop around and ask plenty of questions before you commit yourself.
Foreign currency trading is an exciting world that is luckily now open to even those among us with relatively small capital and it can be both great fun and profitable. Beginning trading without some type of sound Forex trading training is however a recipe for disaster.
# Learn Forex Trading Online And Get Ahead Of The Game
Today's business world is highly complex and it is vital to know your way around. As far as Forex trading in concerned this means knowing the players, the market and the stakes. You have to be familiar with such things as the value of the currency that you are trading, the factors which increase and decrease the value of your currency and trading strategies and market trends.
As a novice this also means that you have to begin with some type of Forex education. A Forex trading course will teach you all about predicting and charting movements of the market together with the best time to purchase or sell a commodity and will introduce you to basic terminology and the trading process.
As Forex trading is done in real time and decisions often must be made quickly, a trader should also be emotionally prepared to cope with the stress, challenges and demands of the marketplace and these too will be included in any good Forex trading course.
So precisely what should you look for when selecting a Forex training course?
All Forex training courses should include the basics on such things as types of orders, leverage and margins which are essential in Forex transactions. It also needs to teach basic terminologies, analysis and software.
Analysis is fundamental to successful trading and any Forex course must look in reasonable detail at both technical and fundamental analysis including the tools used and the pros and cons of each.
However the basics and theories of foreign currency trading are not enough and good Forex course should also teach you correct money management and the development of a good trading psychology and disposition. It is far too simple for traders to become too emotionally involved in trading and it is critical to success that traders understand the importance of such things as discipline, patience and commitment.
Possibly the most important part of the best Forex training courses however is the provision of an apprenticeship program allowing you to gain real-life experience. There is no more effective way to discover how to trade foreign currencies than experience gained in actual trading. Forex courses should therefore offer the opportunity for simulated trading that is as near as is possible to live trading. It is also important that students are given the the opportunity to discuss their trading with their fellow students and to get one-to-one feedback as they practice trading.
For those who want to discover the rules of the game and get a good grip on the market there are several websites offering courses and workshops on Forex trading. Most of these sites offer courses on software and trading tools, trading strategies, networking, risk and money management, technical analysis, market trends and a great deal more.
Nowadays the Internet not only provides the perfect forum for learning Forex trading but also lets you trade from the comfort of your home and allows corporations and private individuals to play the game and conduct their business in this virtual world.
Online Forex trading has opened up the world of foreign currency trading and provides the opportunity for everyone to make considerable money today. But, it is critically important to equip yourself with the knowledge you need before you dive in.
