There are certain features that make forex trading extremely appealing to individual traders as well as to other financial institutions and banks. These are:
- The market is open for 24 hours and for 5½ days in a week.
- It offers highest liquidity with ease of transaction with almost all major currencies of the world.
- Widespread volatile presenting huge profit opportunities.
- Can potentially cover risk exposures with various standalone instruments.
- You earn profit from rates going up as well as down.
- Good leverage with low margin requirements present high profit potential.
- Various options available for zero-commission trading.
How Price is Quoted
In forex trading , currency prices are always quoted in pairs. For example, on a particular date, the rate of EUR/USD is 1.0856 and if you buy 1000 Euros on that particular date, you will have to pay 1085.60 U.S. dollars. But, at a later date if this rate becomes 1.2082, which implies that the value of euro increased in relation to the USD, you can sell 1000 Euros and will receive 1208.20 dollars.
Therefore, you make a net profit of $122.60. So, as an investor, your aim should be to buy currencies at low price and sell those in future in higher prices. If you buy or sell a currency but do not sell or buy back the equivalent amount, it would be referred as open trade or open position.
Major Currencies Traded in Forex
In Forex trading, most of the currencies are traded against USD. The other prominent currencies are Euro or EUR, the Japanese yen or JPY, the British pound sterling or GBP, and Swiss franc or CHF. These five currencies are known as the Majors. The pairs are quoted like USD/EUR or CHF/JPY, where the first one is referred to as the base and the second as the counter or quote currency. The value of the base currency is always 1. All trading is done with currency pairs.
Prices in Forex are quoted to the fourth decimal point (leaving JPY, which is quoted till second decimal point) and in pips or percentage in point. It is the smallest price increment and one pip is equal to 0.0001. When the bid for EUR/USD is 1.0856 and offered rate is 1.0859, it has a spread of 3 pips. Spread, in simple terms, is the difference between the bid and the ask price. The forex market is mainly operated by the brokers who do not charge a commission for their services. And, it is the spread with which they make their profit. For investors, therefore, the lower the spreads the more saving is made.
Margin is the minimum security that ensures that the investor can pay back the amount in case of losses. It is a deposit that covers any future currency trading losses. With margin, you can hold larger positions than you have in your account.
The concept of leverage is also quite common in forex trading, which is the ratio of total available capital to actual capital. If, for example, the leverage is said to be 200:1, it means the Forex broker will lend you $200 for every $1 of your actual capital investment. Though leverage is very important for your trading, higher leverage exposes your investment to higher risks.
Common Methods of Forex Trading
There are three methods for common investors to trade in forex market. They are through the spot market, the forwards and futures market, and the options.
- Spot is the simple currency exchange processes. Here, the settlement date is the second business day after the day the deal or trade is struck.
- Forward transaction is the process where the deal is for more than two days. Future is a type of forward contract, which has fixed currency amounts as well as fixed maturity dates. These are traded in future exchanges and not through general foreign exchange market.
- Options is the process in which fixed currency transactions are carried out with mentioning some specific future date.
Risk Factors in Forex Trading
Although forex trading is extremely lucrative, it has several risk factors involved. Those are risks involving currency exchange rate, interest rate, and risks with credit and country. The average lifespan of a typical trade varies from 2 to 7 days. There are technical and fundamental indicators, which are to be consulted to decide the entry, exit, and other decisions, like order placement etc. You should have solid risk management features and disciplined trading strategies to earn profit in forex trading without risking your investment.
Currency trading is risky but not any riskier than other investment trading (such as the stock market). Forex is the commonly used term for foreign exchange trading. Most large brokerage firms are in some way connected to a bank or financial institution. Interest rate news has a direct impact on the international financial markets.
When you are doing your research of the brokers, check to see what kind of trading tools and analysis data they are offering. The Forex is made available to traders through platforms. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total forex marketplace volume, according to The Wall Street Journal Europe (5/5/06).
Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. There will be a greater demand, thus a higher price, for currencies perceived as stronger over their fairly weaker counterparts. (Pips are the smallest movement a currency can make on the Forex.) Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by a number of elements.
A Foreign exchange broker is paid according to the spread or the difference between the traders bid for a currency, and the sellers asking price for that currency. Different dealers offer very different deals to their customers. A Forex broker does not charge a commission for placing a buy or a sell order the way a real estate broker would charge a percentage fee of the total price of a sale. A broker is any person or firm that charges a fee in exchange for executing trades for a trader.
You can trade 24-hours a day in the biggest and most fluid market in the world. There is very little volume on weekends and holidays and you will probably end up losing money if you choose to trade on these days. Foreign exchange trading starts on Sunday at 5:00 p.m.
If you would like to participate in the Forex market, learn how to manage the risks involved. It is difficult to determine what type of an impact a rate change will have in the marketplace. Margin rules may be regulated in some countries, but margin requirements and interest vary among broker/dealers so always check with the broker you are dealing with and make sure you understand their policy. Leverage financed with credit, such as that purchased on a margin account is very common in Forex.
Fundamental analysis in the Foreign exchange is the economic conditions and the affect those conditions have on a nation’s currency. It is recommended that traders only deal with authorized currency traders. Foreign exchange trading between parties occurs through computer terminals, exchanges and over telephones at thousands of locations worldwide.
Reports released by the government that detail a country’s economic performance are economic indicators. Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. Technical analysis in the Foreign exchange is that price is assumed to reflect all news and the charts provided by the brokers are the objects of analysis. There is the potential for profit in the currencies market regardless of which way the market moves.
The biggest advantage of trading on the Forex market is the so called “Leverage”. It allows to trade with amounts much greater than the actual money you have. For example you can use
only $100 to buy a Forex contract for $10 000. It means that you can profit from a contract for $ 10 000 but the only sum you can actually loose is the $100. Sounds great, doesn’t it!
The leverage can seriously vary but the most common is at a 1:100 ratio. Obviously, the bigger the leverage ratio is the best. It depends on the trading platform and the currency pair but you should always try to use the biggest possible ratio.
And don’t forget the risk: you will never loose $10 000. The only money you can jeopardize is the actual $100.
Forex market is a very specific nonstop cash market where different currencies are being traded, usually by brokers. All the currencies are constantly bought and sold on many local and global markets. Investments increase or decrease in value following every movement of the currency pairs. Foreign exchange market is very vulnerable to real-time events.
Typically Forex offers:
v 24/5 nonstop access by the online platforms.
v Enormously liquid market.
v Volatile markets offering excellent opportunities.
v Different instruments giving easy control over risk exposure.
v Ability to gain profit in both rising and falling markets.
v Leveraged trading having low margin requirements.
What is Leveraged Forex Trading?
Leverage is a term used to describe the difference between what is in your account, and what is available for trading. In Forex trading, leverage is essential as price fluctuations are only a fraction of a cent. If you have a leverage ratio of 200 to 1, that means you can trade $200 for every $1 that is in your account. The high leverage available in Forex trading is why it is so exciting, and so potentially rewarding.
for more information
Market Orders
The most common order is the market order, which is to buy or sell at market. Actually, what this means is that you are buying the quote currency at the brokers ask price or you are selling short at the brokers bid price, which is always lower than the ask price. This is how most brokers make their money, and why they do not need to charge commissions. The spread is the difference between the bid and ask prices. In most cases, the most actively traded pairs will have the smallest spreads, and less actively traded currency pairs will have larger spreads. Spreads also increase when there is increased volatility in the market, even for frequently traded currency pairs.
As soon as you buy or sell short, the spread is immediately subtracted from your equity, because if you immediately closed the transaction even before there are any price changes, then you will lose the amount of the spread.
Stop-Loss Orders
It is very difficult to predict currency prices, and so, to prevent major losses, stop-loss orders are set to close a 
transaction when the losses reach a certain limit. Because stop-loss orders are placed to prevent more losses, they are set on the other side of the limit order to take profits. Thus, a stop-loss order for a purchase transaction is set below the purchase price, and a stop-loss order for a sell short transaction is set above the sell price.
Because of the spread, a stop-loss order for a purchase transaction must be placed below the dealer’s bid quote, which is lower than your purchase price at the time of the transaction. In fact, it should be placed low enough that the random walk of market prices will not trigger your stop-loss order before your limit order. Many traders try to avoid this by not setting a stop-loss order, but this is a mistake. The market could move counter to your expectations for a long time or by a large amount, resulting in very large losses, which are magnified by whatever leverage you are using.
Since currency prices are so unpredictable, it is wise, and most trading platforms allow it, to set both limit and stop-loss orders with the initial order, whether it be a market or an entry limit order.
