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FOREX Currency Trading
101: Make Money with Currency Trading
For those unfamiliar with
the term, FOREX (FOReign EXchange market), refers to an
international exchange market where
currencies are bought and sold. The Foreign Exchange Market that
we see today began in the 1970's, when free exchange rates and
floating currencies were introduced. In such an environment only
participants in the market determine the price of one currency
against another, based upon supply and demand for that currency.
FOREX Currency Trading: FOREX
is a somewhat unique market for a number of reasons. Firstly, it
is one of the few markets in which it can be said with very few
qualifications that it is free of external controls and that it
cannot be manipulated. It is also the largest liquid financial
market, with trade reaching between 1 and 1.5 trillion US
dollars a day. With this much money moving this fast, it is
clear why a single investor would find it near impossible to
significantly affect the price of a major currency. Furthermore,
the liquidity of the market means that unlike some rarely traded
stock, traders are able to open and close positions within a few
seconds as there are always willing buyers and sellers.
Another somewhat unique characteristic of the FOREX money market
is the variance of its participants. Investors find a number of
reasons for entering the market, some as longer term hedge
investors, while others utilize massive credit lines to seek
large short term gains. Interestingly, unlike blue-chip stocks,
which are usually most attractive only to the long term
investor, the combination of rather constant but small daily
fluctuations in currency prices, create an environment which
attracts investors with a broad range of strategies.
FOREX Currency Trading: How
FOREX Currency Trading Works
Transactions in foreign currencies are not centralized on an
exchange, unlike say the NYSE, and thus take place all over the
world via telecommunications. Trade is open 24 hours a day from
Sunday afternoon until Friday afternoon (00:00 GMT on Monday to
10:00 pm GMT on Friday). In almost every time zone around the
world, there are dealers who will quote all major currencies.
After deciding what currency the investor would like to
purchase, he or she does so via one of these dealers (some of
which can be found online). It is quite common practice for
investors to speculate on currency prices by getting a credit
line (which are available to those with capital as small as
$500), and vastly increase their potential gains and losses.
This is called marginal trading.
FOREX Currency Trading:
FOREX Marginal Trading
Marginal trading is simply the term used for trading with
borrowed capital. It is appealing because of the fact that in
FOREX investments can be made without a real money supply. This
allows investors to invest much more money with fewer money
transfer costs, and open bigger positions with a much smaller
amount of actual capital. Thus, one can conduct relatively large
transactions, very quickly and cheaply, with a small amount of
initial capital. Marginal trading in an exchange market is
quantified in lots. The term "lot" refers to
approximately $100,000, an amount which can be obtained by
putting up as little as 0.5% or $500. EXAMPLE: You believe that
signals in the market are indicating that the British Pound will
go up against the US Dollar. You open 1 lot for buying the Pound
with a 1% margin at the price of 1.49889 and wait for the
exchange rate to climb. At some point in the future, your
predictions come true and you decide to sell. You close the
position at 1.5050 and earn 61 pips or about $405. Thus, on an
initial capital investment of $1,000, you have made over 40% in
profits. (Just as an example of how exchange rates change in the
course of a day, an average daily change of the Euro (in
Dollars) is about 70 to 100 pips.)
When you decide to close a position, the deposit sum that you
originally made is returned to you and a calculation of your
profits or losses is done. This profit or loss is then credited
to your account.
FOREX Currency Trading: Investment
Strategies: Technical Analysis and Fundamental Analysis
The two fundamental strategies in investing in FOREX are
Technical Analysis or Fundamental Analysis. Most small and
medium sized investors in financial markets use Technical
Analysis. This technique stems from the assumption that all
information about the market and a particular currency's future
fluctuations is found in the price chain. That is to say, that
all factors which have an effect on the price have already been
considered by the market and are thus reflected in the price.
Essentially then, what this type of investor does is base
his/her investments upon three fundamental suppositions. These
are: that the movement of the market considers all factors, that
the movement of prices is purposeful and directly tied to these
events, and that history repeats itself. Someone utilizing
technical analysis looks at the highest and lowest prices of a
currency, the prices of opening and closing, and the volume of
transactions. This investor does not try to outsmart the market,
or even predict major long term trends, but simply looks at what
has happened to that currency in the recent past, and predicts
that the small fluctuations will generally continue just as they
have before.
FOREX Currency Trading: A
Fundamental Analysis is one which analyzes the current
situations in the country of the currency, including such things
as its economy, its political situation, and other related
rumors. By the numbers, a country's economy depends on a number
of quantifiable measurements such as its Central Bank's interest
rate, the national unemployment level, tax policy and the rate
of inflation. An investor can also anticipate that less
quantifiable occurrences, such as political unrest or transition
will also have an effect on the market. Before basing all
predictions on the factors alone, however, it is important to
remember that investors must also keep in mind the expectations
and anticipations of market participants. For just as in any
stock market, the value of a currency is also based in large
part on perceptions of and anticipations about that currency,
not solely on its reality.
FOREX Currency Trading: Make
Money with Currency Trading on FOREX
FOREX investing is one of the most potentially rewarding types
of investments available. While certainly the risk is great, the
ability to conduct marginal trading on FOREX means that
potential profits are enormous relative to initial capital
investments. Another benefit of FOREX is that its size prevents
almost all attempts by others to influence the market for their
own gain. So that when investing in foreign currency markets one
can feel quite confident that the investment he or she is making
has the same opportunity for profit as other investors
throughout the world. While investing in FOREX short term
requires a certain degree of diligence, investors who utilize a
technical analysis can feel relatively confident that their own
ability to read the daily fluctuations of the currency market
are sufficiently adequate to give them the knowledge necessary
to make informed investments.
Forex Trading Market
Welcome to Forex Trading
Choosing A Forex Broker
Online Forex Trading Advice
Forex Trading For Individual Investors
Make Money With Forex Currency Trading
Forex Signals
Information on Forex Brokers
FOREX Currency Trading:
About the author:
Rich McIver is a contributing writer for The Forex Blog: http://www.forexblog.org
Currency TradingNews. Learn more at http://www.forexblog.org .
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