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|UNDERSTANDING THE BASICS OF FOREIGN EXCHANGE (FOREX) TRADING||Published: 26/09/09|
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Every day, about one trillion dollars worth of foreign currencies are being traded all over the world. This is how big forex trading is nowadays. From a virtual unknown in the investment arena, forex trading has become a global multi-million dollar industry. This can perhaps be attributed to the rise of the internet age, which allows faster transmission of information and the creation of online banking and investment transactions. In the past forex trading was only done by banks and investment houses, now ordinary people can participate in the industry.
But don't get the wrong idea. Just because many people are getting into forex trading does not mean that it is an industry that is easy to figure out. In fact, it can be quite hard especially to someone who does not have any experience with investments. Forex trading can be pretty intimidating at first glance, with its technical terms and business jargon. In fact, experts suggest that you first get to know the industry really well before investing money into it. You can learn a lot from the industry by doing research either from books or from the internet. It is not because the industry of forex trading is difficult to learn. In a sense, it is not. But investing means using your hard earned money and when it comes to financial talk, you need to be really sure that you will earn from the money that you put in.
It's not actually hard to understand forex trading. In simpler terms, it is the buying, selling or exchanging of foreign currencies with the aim to earn money from it. Profit is earned when you have bought the foreign currency at a low price and then sold it at a higher price. You see, the value of foreign currencies is very unstable. It goes up and down depending on a number of factors, which includes the economic condition of the country carrying the currency, the interest rates being enforced in the country and the world demand for it. The fluctuations of the currency prices are the ones that make forex trading complicated and risky especially for new investors.
But Before You Get Started
Foreign exchange, or forex, has been very visible in a number of business profiles ever since small investors were given the chance to join in the realm of currency exchange. Even though there is an evident presence of pressure and rigors of a day job, several traders still aspire to enter and profit from foreign exchange markets.
However, before starting any kind of trading, including those involved in forex markets, you should know what you are getting into: gains and losses. In every venture, it is important to know the risks involved and the techniques in stabilizing the possible outcome of every trading.
1. The Triple Threat Trader
Any trader who masters trading strategies and technical analysis can pinpoint profitable entry and exit points. Mastering the fundamental analysis can help one anticipate turning points in the markets when economies shift. More so, the trader who understands the solid risk management can defend and protect the account against loss in any trading arena. Any trader who masters all of those three, namely the technical analysis, fundamental analysis and risk management, is called the tripe threat trader.
Anyone can be the tripe threat trader. Firstly, it is important to learn the proper techniques in detail, which can be utilized to be successfull in the forex market. Learning to identify the current situation of the market, apply appropriate strategies in trading, and adapt to changes in the market can help anyone master the technical analysis.
It is also important to be educated in fundamental analysis, though it can be intimidating. What separates a good trader from the great one is the solid realization of the fundamentals of the forex market.
Risk management is one element that all traders, who are successful, share together. Having good risk management knowledge can help evade troubles and allow survival from the tough times and even gain valuable experience.
2. Acquiring Experience
Having a proper trading education can help anyone in anticipating several things that might occur in forex; nevertheless, it does not provide experience. Fortunately, gaining experience in trading the forex market, without risking money, can be done by using a practice or demonstration account. There are several forex market makers who offer such accounts and they often include real- time charts, news feeds and price quotes. This is one advantage a beginner can get nowadays. In the past, traders had to learn and make errors using their real money.
An excellent method for potential forex traders to familiarize themselves with the market is the demo trading. It is recommended for a beginner to use a demo account for at least several months before even making a shot at live trading.
Aside from demo trading, mini accounts are also available, which helps neophytes place live trades with minimal risks. These kinds of accounts can be opened with as little as a few hundred dollars. Thus, they create one of the lowest barriers to entry for any market for trading.
As for the transition, it is important to trade using a demo account for several months before advancing on the mini account. Luck is never the same as a successful trading; even if you turn profit on the demo account, but still acquire too much risk during the process, that profit would not suffice for live trading.
3. The Pair to Trade
If you are starting to trade forex, it is necessary to begin with just one currency pair. Moreover, an excellent way to start is with a pair that has a narrow spread, like the EUR/USD pair. The spread of this pair is the difference between the buy price and the sell price.
Additionally, the spread is considered as a formidable opponent, and there are pairs that have wide spreads, which are suitable only for long-term trading. Overcoming the spread can help you reach the point of the trade, called the break-even. Thus, using a pair with a narrow spread can help achieve this level.
Through the use of demo account, begin with the EUR/USD pair and by the time you feel comfortable with the way the pair moves, you can then branch out and try the GBP/USD pair. The GBP/USD pair is similar to the EUR/USD pair but with a better volatility.
Always remember that no two traders are exactly alike. The decision on choosing the pair only relies on your personal style.
However, any moment when you test a new trading technique or currency pair, always remember to do so with a demo account.
Choosing the currency pair best suited for your personality is an element of the learning process to become a forex trader.
4. The Commodity Currencies
After knowing which pairs to trade, you can see if the USD/CAN is a pair that you can enjoy trading. The relationship between this pair and the price of the oil is strong, since the Canadian dollar often gains ground as the prices of energy rise and falls when the energy prices weaken. Commodity currencies are the currencies that share a strong relationship with the price of a commodity, like oil.
There are several commodity currencies that you can explore. One is the CAD/JYP, which has an even stronger relationship with the price of oil. Another pair is the AUD/USD. The AUD or Australian dollar usually rises and falls along with the price of gold. Such correlation is extremely useful to currency traders, who frequently witness occurrences where the price of gold appears to lead the Australian dollar.
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