As foreign exchange trading is by far the most active and largest trading market in existance major participants include commercial banks, corporations conducting international business, hedge funds, international travelers, government central banks, and speculators who hope to profit from the markets volatility and trending nature.
Foreign exchange, or forex as it is commonly called, is a worldwide electronic marketplace and is traded 24 hours a day six days a week. Remember that with time differences around the world it will be Saturday in parts of the world while it is still Friday in other regions. And it will be noon in one place and midnight in another. This alone makes for some interesting challenges in trading.
The volume of daily trading far surpasses that of other markets, including the stock markets of the world. Forex is a big boys market. It's wise to keep that in mind if you want to be a participant.
Forex trading puts one into a zero sum game with some of the brightest and most talented traders in the world. The traders that work for banks may only be taking care of bank customers orders but they still need to be fast thinking and market savvy to handle their accounts well.
A trader who is working for a hedge firm is likely involved in pure speculation. That is the trader is trying to take money from other market players, the more the better. As stated earlier, forex trading is a zero sum game. One traders winnings are other traders losses. Poker is a good example of a zero sum game.
Until Internet trading became possible it was rare for the small independent trader to trade forex. For one thing the cost of the required data feeds, computers, software programs, and computer hardware was out of reach for the average trader.
Only fifteen years ago a top notch trading set up could easily cost you five or six thousand dollars a month in data feed and equipment costs. Not many private traders were trading large enough sums of money to justify that kind of operating expense. Forex trading historically was a big players and institutional game.
The Internet and advancements in computer technology have changed all of that. It is now possible, even easy, for the small speculator to be able to trade from his/her home office and have the use of sophisticated live quote and trade execution services and forex charting services.
There are a large number of online trading firms that cater to individual speculators who offer the formerly very expensive data feed and other services free when you open an account. From five or six thousand a month to free within fifteen years or so is pretty amazing.
So should you trade forex? Well, remember that you will be competing against the best and the brightest. There can be sudden rapid changes of price levels in forex markets and you need to remain alert whenever you have open positions running.
You also need to have trading funds that are truly set aside for speculative trading. Trading forex is a risky enterprise so you need to be darn certain that if you lose your allocated trading money your lifestyle will not be affected.
Trading forex is a real challenge. The challenge is as much psycological as anything else. The greed and fear factor is multiplied in forex trading as you have access to a lot more leverage in your trading account than if you were trading stocks. A lot more.
There are online forex firms that will allow you to trade at a 100 to one leverage factor and more. That is for every dollar you have in your account you can trade one hundred dollars in forex.
My advice; don't take the bait. While trading at 100 to one leverage means that if you are on the right side of a one percent move you will double your money it also means that if you are on the wrong side of the move you will be wiped out.
It's not really the price movements that makes forex risky, on any given day the price ranges in percentage terms are usually no more severe than if you were trading stocks. It's the leverage factor and the failure of many private forex traders to properly control it that makes trading forex risky.
In forex you are the one who choses your leverage factor. Be sure to start out by using a modest amount of leverage, say five to one, not everything that is offered. This is the single most important factor in controling risk.
So again, should you trade forex? If you have spec trading capital, a high degree of discipline, and are willing to do your homework before getting starting forex may just be the ticket for a profitable venture.
To be successful you have to have the discipline to not always be in the market. You must select your entry points with care. Like a great poker player you will probably fold your hand and not be in the game about 85% of the time. For many people, this proves to be hard to do as they like the action and excitment of an open position.
For those individuals who have or can develop the neccesary skill sets trading forex can lead to large profits within short time periods. This is the real attraction of trading forex. A few good trades can multiply your capital several times within a year or less.
If you want to give forex a go do your homework, start small, use reasonable stop loss orders to protect your capital from large single losses, and trade with a reputable online trading firm.
In starting out make sure that you trade only with the major trend. If you make that your rule for opening any position and control your leverage factor you will have a good chance of making winning trades.
First let’s start with a simple equation which in forex trading gives us price
Fundamentals + Investor Psychology = Price
Let’s look at this simple equation in more detail
In forex trading prices move in line with the long term fundamentals over time – that’s why you see currencies trend for months or years, as they ultimately reflect the underlying health of the economy.
You can’t trade these though in isolation.
Why?
Because humans ultimately determine the price of anything and decide the price and they don’t act logically, their dominated by their emotions. In bull markets when greed dominates, they push prices too far to the upside. Conversely, when prices are falling fear, means that prices get pushed to far to the downside.
When a market has been pushed to far up or down by these emotions, the price eventually recoils beck to be in line with the longer term fundamentals.
FACT:
Most markets collapse when they are most bullish and rally when their most bearish – this is a reaction to traders pushing prices too far.
These price spikes are easy to see on a forex chart.
Short term price spikes never last long and if you learn to trade them, you can make money from other trader’s greed and fear.
It’s not enough to spot a market ruled by greed and fear and sell or buy IT - you need to find out when the turning point is coming, this is the hard part!
The key here is to look at price momentum and support and resistance.
Firstly, watch for prices to form a top or bottom in some shape or form, then watch momentum oscillators to time your entry.
If you are unfamiliar with using momentum, you need to make it an essential part of your forex education.
Three good oscilators to start with are:
The stochastic, the average directional movement and relative strength index.
All of these gauge the momentum of price when they wane at important resistance or support levels from over-bought readings a turning point is near.
The trick is to wait for CONFIRMATION.
Don’t guess a top or bottom, wait for resistance or support to form and a change in price momentum and then its time to execute your trading signal.
The beauty of looking at a forex chart is that it takes into advantage the fundamentals (it simply assumes that in today’s world of instant communications they show up in price action instantly) - but more importantly it shows you the reality of how investors perceive the price. You therefore see:
The truth – the price as it is and act on the reality.
No hoping guessing or listening to opinions – you see the facts and can take advantage of them, to buy or sell, with great odds and profit potential.
Many traders like to listen to the news or opinions - but if you do you will join the losing majority.
Forex charts will keep you detached and focused on the reality of price so you can take a step back and see things clearly with no emotions involved.
This may sound simple and it is.
You just need to keep your emotions out of your trading and watch price action – if you learn to do this and stand alone you will win.
At turning points, the more traders who disagree with you the better – only the minority of traders (who make the big profits catch them) so you’re in good company. If you want to win big at forex trading learn to stand alone – buy fear and sell greed and you can pile up some huge profits.
Both Gerald Greene & Kelly Price are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Gerald Greene has sinced written about articles on various topics from Forex Trading Forex, Finances and Stock. Gerald is a full time Internet business developer who works from Thailand. His newest project is Additional. Gerald Greene's top article generates over 9900 views. to your Favourites.
Kelly Price has sinced written about articles on various topics from RSS, Learn Trading and Forex Trading Forex. NEW! FREE 2 x CRITICAL TRADER PDFS - NEWSLETTERS - TRADING ALERS + MORE On all aspects of becoming a profitable trader including: Free critical trader PDFS, and more. Kelly Price's top article generates over 165000 views. to your Favourites.