Introduction To Forex Trading

There are many markets: markets for stocks, futures, options and currencies. These are probably the most accessible markets for everyday traders like you and I. People easily understand the basics of trading shares. I began trading shares first and then I moved on to trading currencies.

If you do not know a lot about currency trading, allow me to introduce it to you. It is what I trade and I believe that it is one of the best markets to trade because of its efficiency. The transaction costs to execute a trade are minimal and most brokers provide you with the tools and data you need to make your trading decisions, they usually provide them for free. The market is open 24 hours a day which allows you to design your trading hours around your daily commitments. It is very volatile, which is great for those people who are looking for day-trading opportunities.

The foreign exchange market is the market in which currencies are bought and sold against one another. People may loosely refer to this market under different labels, including foreign exchange market, forex market, fx market or the currency market.

The foreign exchange market is the largest market in the world, with daily trading volumes in excess of $1.5 trillion US dollars. All transactions involving international trade and investment must go through this market because these transactions involve the exchange of currencies.

It is the most perfect market that exists because it has a large number of buyers and sellers all selling the same products. There is a free flow of information and there are little barriers to participate.

The currency exchange market is an over-the-counter (OTC) market which means that there is not one specific location where buyers and sellers can actually meet to exchange currencies. Instead, transactions are conducted by phone, fax, e-mail or through the websites of brokers who specialize in currency trading.

The major dealing centres at the time of writing are: London , with about 30% of the market, New York , with 20%, Tokyo , with 12%, Zurich , Frankfurt, Hong Kong and Singapore , with about 7% each, followed by Paris and Sydney with 3% each. Because of the fact that these centres are all over the world, foreign exchange traders can execute transactions 24 hours a day. The market only closes on the weekends.



THE MAIN ‘PLAYERS' IN THE FOREX MARKET

The five broad categories of participants are: consumers, businesses, investors, speculators, commercial banks, investment banks and central banks.

Consumers, including visitors of countries, tourists and immigrants, do need to exchange currencies when they travel so that they can buy local goods and services. These participants do not have the power to set prices. They just buy and sell according to the prevailing exchange rate. They make up a significant proportion of the volume being traded in the market.

Businesses that import and export goods and services need to exchange currencies to receive or make payments for goods they may have bought or services they may have rendered.

Investors and speculators require currencies to buy and sell investment instruments such as shares, bonds, bank deposits or real estate.

Large commercial and investment banks are the ‘price makers'. They are the ones who buy and sell currencies at the bid-and-offer exchange rates that they declare through their foreign exchange dealers.

Commercial banks deal with customers on one hand, and with the Interbank or other banks, on the other hand. They profit by utilizing the bid-and-offer spread. The bid price is the exchange rate that the buyer is willing to buy and the offer price is the exchange rate at which the seller is willing to sell. The difference is called the bid-offer spread. They also make profits from speculating about whether the exchange rate will rise or fall.

Central banks participate in the foreign exchange market in their effective duty as banks for their particular government. They trade currencies not for the intention of making profits but rather to facilitate government monetary policies and to help smoothen out the fluctuation of the value of their economy's currency.

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This is an excerpt, modified from the book: The Part-Time Currency Trader, featuring examples of how to trade these currency pairs.

Are you prepared to currency trade?

Currency trading is the most popular way to earn to money and it is without doubt a very profitable market. However few are familiar with its unpleasant intricacies and most ignore a very important aspect: risk. It is not enough only to be given the chance to invest your money successfully, you have to be careful because Currency trading can be an efficient trading system or it can ruin you. Why is Currency trading risky?

- Currency trading is very unstable. It is the subject of rapid and overwhelming changes. The market is volatile and it is influenced by political events.
- One can loose at any time especially when he has just ventured into Currency trading. Experience, information and attention are necessary.
- Some unexpectedly loose the Risk Capital which sometimes consists of College money, the retirement funds or some other substantial sum that shouldn’t have been considered as Currency trading capital in the first place.
- Fluctuations in currency prices, discrepancies between interest rates in two different countries, insolvency of financial institutions that take part in transactions and limited flow of exotic currencies will most likely lead to loss.
- Large profits and minimal losses are impossible to predict with 100% certainty.
- The Currency trading market has great winning potential, but it also has loss potential.
- Misinformation and the emotional baggage are most of the time cause of loss. Use facts, not hope or fear, when Currency trading.
- Sometimes trends can lead to money loss.
- Huge leverage is available to traders. This leads to dangerous positions that risk too much in comparison with the size of the account.
- Lacks of money management and of back testing plans are the mistakes that currency traders make sometimes.
- Using brokers is sometimes inefficient because this counterpart can refuse to trade during volatile market conditions affecting the retail trader. They can even widen spreads. However it is recommended to collaborate with a broker, because he can deal in the interbank market and he surely knows more about Currency trading making it safer from other points of view.
- Scams were very common years ago when dealing with a broker. However, one can be confident with the person he is working with by checking their background and the Institutions he is associated with (large banks, important insurance companies).

Don’t be frightened! It isn’t all about risks. And don’t start trading in fear! You will loose this way. You just have to keep in mind all possibilities and avoid unwanted situations only you can get yourself into. All Currency traders have to be very well informed about their activity. They have to know technical analysis and how to read and interpret charts, they have to develop effective strategies and minimize risk. The financial exposure has to be limited and this can be done in many ways available to currency traders who inform themselves.

So, educate yourself, be prudent, take risks only when you can handle loss and always be prepared for anything. And have this in mind: If Currency trading isn’t profitable then why are so many financial investors, banks, international institutions and important players that obtain huge amounts of cash by simply turning their own money into other currencies?