Forex Trading - A Basic Overview
Forex trading is becoming more popular as time goes by. Perhaps you have heard of forex trading, or heard things such as "the dollar fell sharply against the yen". Not sure what all this means? Here is a basic overview of forex trading. The foreign currency exchange market (forex) is the largest market in the world. Much larger than the stock market! Some of the reasons for its popularity are that leverage allows maximum usage for your money and there is very high liquidity. The forex market is also open 24 hours a day, although some hours are much better trading times than others. Forex is traded on margin. This means that you can control a large amount of money for a small bit of cash. With a 1% margin, $1000 in cash would leverage you one hundred thousand in the forex market trading. What this basically means is that your rate of return (or ROI) is going to be 100% for each percentage change upwards. Of course, this means that your loss would be equally as great if the market went against you. Forex trades are always done in pairs. You always purchase one currency at the same time as you sell another. While there are many pairs in the forex market, there are really four major currency pairs: USD/JPY, USD/GBP, GBP/USD and USD/CHF. These pairs see the most market activity. When you work with forex trades, you do not pay a commission fee per trade, unlike the stock market. What you do pay is a spread. That is the difference between the asking rate and the bid rate of the currency pair. The spread is determined by the trading company you work with. The spread is how they make their money. Be careful in trading, as some brokers will increase the spread during big news breaks (such as non farm payroll announcements), or during off peak hours. Since you are buying and selling currencies at the same time, it doesn't matter whether the market is up or down. You can make money either way. For example, if the GBP/USD is going up, it means the pound is stronger than the dollar. If you think good economic news is coming for the dollar, you may want to sell the GBP/USD and buy USD/GBP. Price quotes are based on pips - which is the smallest unit that a pair can trade at. It is the very last number on the right of a quote. For example if a currency bid is 1.0345 and the ask is 1.0347 - the difference is equal to 2 pips. This is the spread that was mentioned earlier. There are two types of forex traders, those that are technical traders and those that are fundamental traders. Technical traders base their trades on a lot of different statistics and parameters. Viewing past patterns the currencies form will give a technical traders strategies on which pairs to buy or sell. Technical traders don't necessarily take news into consideration and often don't trade during big news breaks. Fundamental traders work only with news. They have a calendar marked with big market news days, such as job numbers, consumer confidence, retail sales, etc. They then plan their strategy to buy and sell based on what those numbers are predicted to be. If you are interested in learning more about forex, there are many website with free training available, or you can purchase courses to learn. Take the opportunity to open a free 'game' account, such as at oanda.com - and practice trading whichever strategy you want to follow until it becomes second nature. This is a great tool before you actually put real money into the market!
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