The Basics of Currency Trading For Beginners

Investors and traders around the world are looking to the Forex market as a new speculation opportunity. But, how are transactions conducted in the Forex market? Or, what are the basics of Forex Trading? Before adventuring in the Forex market we need to make sure we understand the it, otherwise we will find ourselves lost where we less expected. This is what this article is aimed to, to understand the basics of currency trading.

What is traded in the Forex market?

The instrument traded by Forex traders and investors are currency pairs. A currency pair is the exchange rate of one currency over another. The most traded currency pairs are:

USD/CHF: Swiss franc
GBP/USD: Pound
USD/CAD: Canadian dollar
USD/JPY: Yen
EUR/USD: Euro
AUD/USD: Aussie

These six currency pairs generate up to 85% of the overall volume in the Forex market. So, for instance, if a trader goes long on the Euro, she or he is simultaneously buying the EUR and selling the USD. If the same trader goes short or sells the Aussie, she or he is simultaneously selling the AUD and buying the USD.

The first currency of each currency pair is referred as the base currency, while second currency is referred as the counter or quote currency. Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency. If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR.

Bid/Ask Spread

All currency pairs are commonly quoted with a bid and ask price. The bid (always lower than the ask) is the price your broker is willing to buy at, thus the trader should sell at this price. The ask is the price your broker is willing to sell at, thus the trader should buy at this price.

EUR/USD 1.2645/48 or 1.2645/8

The bid price is 1.2645

The ask price is 1.2648

A Pip

A pip is the minimum incremental move a currency pair can make. A pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.35 to 113.40 equals 105 pips.

Margin Trading (leverage)

In contrast with other financial markets where you require the full deposit of the amount traded, in the Forex market you require only a margin deposit. The rest will be granted by your broker.

The leverage provided by some brokers goes up to 400:1. This means that you require only 1/400 or .25% in balance to open a position (plus the floating gains/losses.) Most brokers offer 100:1, where every trader requires 1% in balance to open a position.

The standard lot size in the Forex market is $100,000 USD.

For instance, a trader wants to get long one lot in EUR/USD and he or she is using 100:1 leverage.

To open such position, he or she requires 1% in balance or $1,000 USD.

Of course it is not advisable to open a position with such limited funds in our trading balance. If the trade goes against our trader, the position is to be closed by the broker. This takes us to our next important term.

Margin Call

A margin call occurs when the balance of the trading account falls below the maintenance margin (capital required to open one position, 1% when the leverage used is 100:1, 2% when leverage used is 50:1, and so on.) At this moment, the broker sells off (or buys back in the case of short positions) all your trades, leaving the trader "theoretically" with the maintenance margin.

Most of the time margin calls occur when money management is not properly applied.

What is the mechanism of a Forex trade?

The trader, after an extensive analysis, decides there is a higher probability of the British pound to go up. He or she decides to go long risking 30 pips and having a target (reward) of 60 pips. If the market goes against our trader he/she will lose 30 pips, on the other hand, if the market goes in the intended way, he or she will gain 60 pips. The actual quote for the pound is 1.8524/27, 4 pips spread. Our trader gets long at 1.8530 (ask). By the time the market gets to either our target (called take profit order) or our risk point (called stop loss level) we will have to sell it at the bid price (the price our broker is willing to buy our position back.) In order to make 40 pips, our take profit level should be placed at 1.8590 (bid price.) If our target gets hit, the market ran 64 pips (60 pips plus the 4 pip spread.) If our stop loss level is hit, the market ran 30 pips against us.

It’s very important to understand every aspect of forex trading. Start first from the very basic concepts, then move on to more complex issues such as Forex trading systems, trading psychology, trade and risk management, and so on. And make sure you master every single aspect before adventuring in a live trading account.

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What is a Forex Broker

A Forex broker is very similar to a stock broker, and many new online Forex brokerages have recently emerged. The key difference is that Forex brokers deal only in currency exchange investments.

Similar to securities brokerages, Forex brokers come in all sizes, shapes, and levels of service. An online Forex broker provides minimal service at minimal cost. If you require more advice and expert guidance, there are many full service Forex brokers available, as well.
If you do go with an online broker, make sure that you choose one that has an extensive online knowledge base and 24/7 support so that you can execute all trades wisely, and quickly.

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The Forex Margin Trading

The trading unit of foreign currencies is defined as 10,000 in US dollar or 100,000 US dollar. Assuming one US dollar is worth to 120 Japanese Yen, 10,000 USD should be equal to 1.2 million JPY, and 100,000 USD to 12 million JPY. This merit is to enjoy the bigger trade than you actually have with using margin account, so there seems to be many chances to make bigger money on revaluation gains. On the other hand, the demerit exists that you would lose bigger money than you expect.

Unlike the foreign currency deposit, the forex margin trading is a very speculative financial product. It is necessary to understand the nature of risks where to expose, and to trade forex using your own capacity with self-responsibility. It is not suitable to trade forex using the indispensable capital for your life, i.e., the retirement fund or pension.

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Main Merit of Forex Market

Main Merit of Forex Market are :

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i) 24-hour trading, 5 days a week with non-stop access to global Forex dealers

ii) An enormous liquid market making it easy to trade most currencies

iii) Volatile markets offering profit opportunities

iv) Standard instruments for controlling risk exposure

v) The ability to profit in rising or falling markets

vi) Leveraged trading with low margin requirements

vii) Many options for zero commission trading

vii) A trader can open a position for any period of time he wants

ix) No fees, except for the difference between buying and selling prices

x) An opportunity to get a bigger profit that the invested sum

xi) Qualified work in the FOREX market can become your main professional activity

xiiii) You can make deals any time you like

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How do I open a Forex Trading account

A forex trading account can be opened with any established forex broker. Before you open a forex trading account, please be sure to check the broker’s endorsements as a Futures Commission Merchant (FCM) registered with the National Futures Association. You can open a forex trading account online, over the telephone, or via fax.

To open a forex trading account, you will need your standard information as well as social security number and bank account information. This is why it is important to verify that the broker is a member of the National Futures Association.

Once your account is open, you can choose to participate in a demo account or begin live forex trading.

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What are Foreign Currency Trading Rates

The simplest definition of foreign currency exchange rates is the rate at which one currency, such as U.S. dollars, can be traded for another. As these currency exchange rates fluctuate constantly, there is considerable opportunity to earn money from the differences - called "arbitrage."

There are online sites that show currency exchange rates in real time where traders, or travelers, can check exchange rates.The market through which investors trade in foreign currencies is called the Forex market.

Foreign Exchange Rates (Daily Updates) Link to Statistical Release

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History of Forex Trading

Many centuries ago, the value of goods were expressed in terms of other goods. This sort of economics was based on the barter system between individuals. The obvious limitations of such a system encouraged establishing more generally accepted mediums of exchange. It was important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon various metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value.

Coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the Middle Ages also gained acceptance. This type of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of today’s modern currencies.

Before the first World war, most Central banks supported their currencies with convertibility to gold. Paper money could always be exchanged for gold. However, for this type of gold exchange, there was not necessarily a Centrals bank need for full coverage of the government's currency reserves. This did not occur very often, however when a group mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called "Run on banks " The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability.

In order to protect local national interests, increased foreign exchange controls were introduced to prevent market forces from punishing monetary irresponsibility.

Near the end of WWII, The Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US Dollar. International institutions such as the IMF, The World Bank and GATT were created in the same period as the emerging victors of WWII searched for a way to avoid the destabilizing monetary crises leading to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that reinstated The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis.

The Bretton Woods system came under increasing pressure as national economies moved in different directions during the 1960’s. A number of realignments held the system alive for a long time but eventually Bretton Woods collapsed in the early 1970’s following president Nixon's suspension of the gold convertibility in August 1971. The dollar was not any longer suited as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.

The last few decades have seen foreign exchange trading develop into the worlds largest global market. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values.

In Europe, the idea of fixed exchange rates had by no means died. The European Economic Community introduced a new system of fixed exchange rates in 1979, the European Monetary System. This attempt to fix exchange rates met with near extinction in 1992-93, when built-up economic pressures forced devaluations of a number of weak European currencies. The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exchange rates but also actually replace many of them with the Euro in 2002.

Today, Europe has embraced the Euro in 12 participating countries. The physical introduction of the Euro on January 1, 2002 saw the old countries currencies made obsolete on July 1, 2002.

In Asia, the lack of sustainability of fixed foreign exchange rates has gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable.

While commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The size of the FOREX market now dwarfs any other investment market.

It is estimated that more than USD 1,200 Billion are traded every day, that is the same amount as almost 40 times the daily USD volume on the American NASDAQ market.

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Strategy For Profitable Forex Trading

What is required of you to be a profitable trader?

There are more than one answer to this question. One answer is given in this article based on the experience of the several successful traders of forex and other instruments…

There are only two questions a forex trader has to ask him or herself. If the affirmative can be answered to both questions, the forex trader is a professional .If the trader can not be answered to either or both questions; the trader could continue to wipe out profits, possibly ending up in substantial and permanent losses.

1) Do you know how to identify trades that 4/5 trades at the least will get you on target for a business plan that covers the short, medium and long term?

2) Can you apply your trading methodology under different market conditions over the short, medium and long term and turn your trading plan into reality

There is convincing evidence that to become proficient at the number one criterion, there is no substitute for spending time listening to and watching the market over a consistent period, at least of months. There is no “get rich quick” strategy that has been invented, except that of gamblers luck.

Secondarily to that first point, a foundation in technical analysis is required and a pretty thorough knowledge of fundamentals, including forex jargon is a good footing. This does not need to be learned theoretically in parrot fashion, but needs to be applied in conjunction with the previous paragraph. Only then will the necessary belief in certain technical strategies be referenced sufficiently for “natural” talent & skill to be cultivated.

Risk tolerance needs to be established at an early stage so that losses can be protected using a stop-loss. Profit targets for certain trades can also be drawn up as part of the trading plans rules. If your intraday trading risk tolerance is for example 15 points, then profit target trades of 15-30 point trades need to be sought out and discovered. The opportunities await each day.

Testing, back-testing and forward-testing of methodology is an evolutionary process. It is ok to make mistakes, so long as they are learned from and keep within the boundaries of the current rules. It is therefore also going to be the case that non-stop improvement of the strategy and the skill of the trader will take place, and the strategy, even the instrument traded may change dramatically over time as more information is gathered and the trader becomes more familiar with their trading style and themselves.

Trading can be considered an “inside game.” The more one knows themselves, the more likely they are going to have the discipline, patience and awareness required to spot opportunities and seek out the correct research in order to plan and execute trades make the difference between a professional investor and an emotion driven gambler.

Research into the brain shows there are two kinds of thinking. There is the primitive type of thinking built on biochemical and emotional reaction. The trader in the state of arousal with adrenalin before the trade may be leaving themselves open to danger, because this is a primitive fear/flight or flight mechanism, requiring a reactive response.

However, when the mind thinks using the cortical part of the brain, more of the neurons are incorporated into the thinking process and therefore a more balanced and effective decision will be made.

A constant and rigorous monitoring of trading performance is required therefore from the outset so that the mind knows what is required to be on track with the trading plan and adjustments can be made to the strategy so that the purpose of the plan is fulfilled. Testing and tweaking under forward conditions allow the trader to hone in on areas of weakness and root them out, making the results more pronounced.

Howto Achieve Perfection in Trading ?

Achieving Perfection in daily Trade Market - Achieve Trade quality, Not quantity . Take the best of the best advice, get the big picture on trading.

Trade selection and adequate planning go hand in hand. This is where most would-be professional traders miss the boat.

Much more money is made as a result of proper planning than from sitting and trading everything that comes along or “looks” good.

It’s difficult to fully understand why people think they have to trade so much. It’s difficult to truly grasp why people think that they have to take as many trades as they do.
Just the opposite is true. There is a correct approach to each and every trade. That is what achieving perfection is all about.

It all starts with proper management: planning, organizing, delegating, directing, and controlling.These facets of management must be woven together into your trading; they do overlap.

Although planning is the major management function involved in achieving perfection, you can’t possibly plan well unless you are organized to do so.

You must have your tools at hand: your trading software, your data, the proper equipment. All of the rudiments for planning must be in place, which in itself is a part of organizing.

You must be physically fit when you plan: well nourished, properly exercised, well rested and mentally alert - all part of having your life organized, all part of achieving perfection as a trader.

To be a winning trader, you have to be among the best. There can be no middle ground. There are only winners and losers, and to be a winner you have to be a champion. And, just like any champion, you must have discipline, self-control, and a willingness to train, train, train.

There are no runners-up in trading, you either get the gold or you give the gold. Often, while others are busy going to parties or watching sports events, you are busy poring over charts, studying, thinking, planning. When others are listening to music or watching TV, you are busy practicing your trading, practicing trade selection, working hard to become a more astute trader.

Part of achieving perfection involves the diligent study of charts. The data, as presented on your screen and preserved as charts, are, for the most part, all you have for making trading decisions. They are a picture, a visualization of what is taking place in the reality of the forex market. Your job in achieving perfection and becoming an adequate trader is to picture and imagine in your mind what makes prices move and form the way they do.

Ask yourself, “How does what I see in front of me relate to the supply and demand for the underlying?”

Ask yourself, “Is what I am seeing on the chart even related to supply and demand, or is what I am seeing related to an engineered move by some insider or market mover?”

Supply and demand are not what makes prices move or fail to move most of the time. The sooner you realize that fact, the better off you will be. Markets are engineered, manipulated? You need to know that.

But there’s more to a chart than merely price patterns. Reflected in the chart are the emotional reactions of human beings. Reactions to rumors and news; to national and world events; to government reports - these, too, are on the charts.

You might say that price movement, or the lack thereof, is the net effect of all the perceptions of all the traders who are participating in the market for a particular futures.

There is something else on the charts, something that too few take into account. That something is the manipulations from and by the insiders, the market movers, and by commercials holding large inventories of the underlying you are attempting to trade.

In achieving perfection as a trader, you must train yourself to look for evidence of any and all of these things as you study your charts. It is the cumulative action of all perceptions which causes patterns to form on a price chart.

You must learn to look for the truths in the markets. There are certain truths which are self-evident; they are always true. For instance, take the phenomenon of a breakout. When prices break out, no one can change the fact that they did break out. It is a fact and it is true. The breakout may turn out to be a “false” breakout, but nevertheless it is a breakout. As part of achieving perfection in your trade selection skills, you have to learn to tell which breakouts are most likely true breakouts, and which ones are most likely false. How can you know? By the price patterns on the chart.

And what about trend? Your job in achieving perfection as a trader is to master how to trade a trend. A trend is a trend, is a trend. It is a trend until the end, and part of your job is to know when a market is not trending.

The trend is the trend while it lasts. While a market is trending it is telling the truth. The trend can change, but the truth is the truth. If prices are rising, the trend is up. If prices are falling, the trend is down. The truth can be found in the trend. It is an immutable fact. You are to learn to make my money by trading with the trend. You are to learn what constitutes a trend. You have to learn to spot trends early so that you can make the most out of the market while it is trending. Your job in achieving perfection as a trader is to learn to recognize when a trend will most likely begin, and just as important, to learn to be even more adept at deciphering when a trend is ending.

In achieving perfection, you must learn to recognize “your” trade(s), and to take only “your” trades. Trade the formations and patterns that you can easily recognize and identify.

You must learn to trade using tips and tricks that you are shown and to accumulate and keep a collection of techniques that result in the selection of high probability trades.

How are you to do all this? Practice, practice, PRACTICE. Practice recognition of congestion areas. Practice recognition of high probability breakouts. Practice trend recognition. Practice and more practice. Just like anyone who wants to achieve perfection at anything, there must be total dedication, study, practice and more practice. You are to become a trading virtuoso. You are to practice, yet always realizing that you will never attain true perfection, that there is always room for improvement. There is usually a way to refine: ways that you can do things better, more efficiently, and with greater speed and finesse.

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What is Forex (Foreign Exchange) ?

Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange. It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers.

Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.

Most forex trading is speculative, with only a few percent of market activity representing governments' and companies' fundamental currency conversion needs.
Unlike trading on the stock market, the forex market is not conducted by a central exchange, but on the “interbank” market, which is thought of as an OTC (over the counter) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the forex market is a 24-hour market.

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