Forex Trading (3)

The Forex trades 24 hours a day, and any time during those 24 hours you can turn on your computer and sit down to trade. The most important first step of success in trading currencies is determining market direction. The fact is if you want to make money currency trading, you will have to take a bullish or bearish position. One or the other - never both. You cannot make money taking a bullish and bearish position at the same time; you would be in a net zero position, making and losing the same amount of money with every pip movement.

People trade according to their personalities. Aggressive people love to scalp, while passive people prefer long-term trading. Figuring out your trading style is very important before you trade. However, whether you are a passive trader or an aggressive trader, you need to be able to determine market direction before you trade. You need to learn how to find the current trend before you enter the market, because you need to trade in the direction of the trend at all times. Do not fight the trend. Fighting a trend is like trying to swim upstream through violent forceful rapids. It doesn’t work. Traders can make many mistakes. The biggest mistake is trading in the wrong direction.

As the market moves, it will only move in one of three directions: up, down, or sideways. When it moves in any direction, it waves. Those waves become the emotional enemy of most traders. For some traders, it can take years to trust those waves and ride them to their end target. The more information you can gather as to why the market should bounce in a certain direction at a certain price point, the higher the probability for success.

In the currency market or on the Forex, each country around the world has approximately 20 major fundamental announcements annually for investors to monitor. The importance of the announcements shifts as the economy shifts. Governments report the health and overall economic well-being of a country to investors via fundamental announcements, which are the economic indicators of the country.

You can keep up with all major government reports that affect the Forex at www.markettraders.com or www.forextips.com, under the heading “Economic Reports”, or in leading newspapers, such as the Wall Street Journal, the Financial Times, or the New York Times. Although newspapers are great resources for information on fundamental announcements, the Internet is now the number one source for investors.

When a fundamental announcement is about to occur, investors usually stop buying or selling right before the announcement. If the news is good, prices may go up, and if it is bad, prices may go down. Either way, to play it safe, they usually wait until the announcement is read before they take
a position in the market. Within seconds after the announcement is read, a frenzy of buying or selling starts to take place, potentially creating a dramatic price change in only a couple of seconds.

Most fundamental announcements create a dramatic change in the market. The only thing in life that remains consistent is change. Currencies may aggressively react to fundamental announcements or they may not. Successful and educated traders respond, rather than react, to those announcements. They are well prepared and ready to switch from being a bull to becoming a bear. Trading on the Forex with or without fundamental announcements can create an environment where there are unexpected surprises, creating trading ranges of perhaps 150 to 300 pips in a single four- to five-hour trading session.

Your future depends on many things when you trade. In this market, it depends mostly on you - your education, your emotions, and what you do with them.

Forex Trading (2)

Price interest points, commonly known as pips, are usually expressed in decimals. Depending on the pair of currencies being traded, pips are usually the last numbers of the decimal.

A trader’s financial reward is measured in pips, which are then converted into dollars. Most traders on the Forex trade with what is called leverage. This is borrowing or using a broker’s money to trade. You acquire leverage by posting a bond or a deposit with a Forex broker who then allows you to trade using the broker’s money. When a trader executes a trade on the Forex, the trader is buying or selling currency in units referred to as lots (which is a set quantity of money). There are typically two types of lots that traders will trade. A $100,000 unit is called a regular lot, and a $10,000 unit is called a mini-lot. When you buy and sell a regular lot, you get paid $10.00 a pip versus $1.00 a pip on the mini-lot.

The average minimum deposit for trading with leverage is 1 percent, which means that for every $100,000 lot you trade, you must have $1,000.00 in your margin trading account. For mini-lots, you will need a minimum of $100.00 in your margin trading account on deposit. Trading can be a worthy full-time profession or a great way to earn secondary income.

The purpose of a broker is to facilitate the trade. After you open a trading account, the broker gives a trader the right to execute transactions, which includes certain rights and privileges, including the right to be a bull or a bear. The terms bull and bear were created by traders in the stock market in
the early 1900s to identify the direction someone was trading in the market. The term bull was derived from the way in which bulls attack or charge, moving upward. In contrast, bears move downward when they attack or charge.

Bulls, therefore, resemble a buying market, because they believe prices will continue to move upward, or rise, whereas bears resemble a selling market, because they believe prices are going move downward, or fall. Every trader has to make a decision to be either a bull or a bear before entering the market. Bulls enter the market buying (first) and exit selling (second). Bears do the opposite: they enter selling (first) and exit buying (second). To make a profit in the market, you must always buy low and sell high. Both bulls and bears are trying to do that; bears just reverse the transactions.

One of the most important and productive habits you can adopt is properly educating yourself about the Forex before you begin trading. If you move forward without the proper education, be prepared to lose your money, much like in a casino. You will be trading off your “gut feel” and emotion and placing yourself in the same position as that of a reckless gambler. Just like the casino, the market will be there to take all your money.

Bulls and bears fight aggressively to make the market go their way. For the Forex market to trade, there must be someone buying and someone selling simultaneously. In other words, one trader must be a bull going long and one must be a bear going short. Both traders are adamant about their positions, despite the fact that they rely on extremely accurate information, often from the same sources. What is amazing is they are adamant about the market going in opposite directions. In the market, the bulls and bears have different characteristics, yet they want the same thing - they both want to make a profit.

Bulls and bears enter the market buying or selling in hopes that more bulls or bears will enter after them, giving the market what is called bullish or bearish strength - creating a greater rally or greater dip. If their counterparts step in, the market will begin to move in their direction. Take the bulls, for
example. If you wanted to be a bull, you would enter the market and, if your analysis was right, more bulls would enter and the market would begin to rally and reach new highs, or what is called higher highs. Most of the time, after the bulls achieve a new high, frequently prices start to retrace, or fall back down.

Bulls and bears keep track of all the previous highs and lows, no matter how far back they go. When bulls achieve a new high - higher than a previous high - they do “scoring a point,” and after the point is scored, the market pulls back. Conversely, the bears, too, are trying to score points by taking the market lower and making lower lows. When the bears make a lower low, lower than a previous low, they “score a point,” which is followed by a pullback. Bulls and bears play this eternal game 24 hours a day, seven days a week. Bulls fight for control, proving their strength  by making new highs, and bears fight for the opposite.

Resistance occurs when the bulls move the market to a new high that is higher than a previous high and the bears jump in aggressively selling, attracting more sellers than buyers, interrupting the rally and creating a retracement or pullback from that high. The new high becomes the new level of resistance, which is defined as a market high or a price level where bears start selling enough to interrupt and reverse a rally.

Support occurs when bears move the market to a new low that is lower than a previous low and the bulls jump in aggressively, buying to support the price and attracting more buyers than sellers. That increased buying interrupts the dip and creates a retracement or pullback from that low. The new
low becomes the new level of support, which is where bulls start buying enough to interrupt and reverse a dip. Bulls on the Forex are the buyers who are looking for opportunities to buy a currency pair at a low price in order to sell it at a higher price for profit. Bears want to take the market to lower levels, enabling them to sell high and buy low, which is nothing more than buying low and selling high backwards.

Forex Trading (1)

Forex is an acronym for foreign exchange, a market where people exchange the currency of one country for the currency of another in order to do business  internationally. Typical situations in which such currency exchange is necessary include payments of import and export purchases and the sale of goods or services between countries. Forex is also called the cash market or spot interbank market.The spot market means trading on-the-spot, at whatever  the price is at that moment.

Prior to 1994, the Forex retail interbank market for small individual speculative investors or traders was not available. A speculative investor, or speculative trader, is one who looks to make a profit on price movement in the market and is not looking to hold onto any currency long-term. But with the average minimum transaction size of $1,000,000, smaller traders were all but excluded from participation in this market. Then in the late 1990s, retail market maker brokers (companies that facilitate the trades for speculative traders) were allowed to break up the large interbank units and
offered individual traders the opportunity to participate in the Forex market as we know it today.

Forex is considered the largest financial market in the world. The term market refers to a place where buyers and sellers are brought together to execute trading transactions. More than $1.5 trillion U.S. dollar is traded daily on the Forex. By comparison, $300 billion dollars is traded daily on the U.S. Treasury bond market and $100 billion dollars is traded daily on the U.S. stock market, for a total of $400 billion dollars per day. Forex trades nearly four times that volume daily, exceeding the daily combined activity of all the other financial markets.

Forex has no physical location - transactions are placed via the Internet or telephone - but is composed of approximately 4,500 international world banks and retail brokers. Individual traders wanting to profit by speculating on price changes can only access this market through a Forex broker, such as I-TradeFX.com. It is a good practice of a speculative trader to only deal with Forex brokers that are regulated by the governmental bodies in their respective countries.

Trading currencies involves the fluctuation of one currency in relation to another. That is the main difference between trading currencies and stock trading - you always have to deal with two instruments, or currency pairs, whereas in stock trading you only deal with one instrument. The definition of a currency pair, or currency cross, is trading one currency for another currency, and you need a currency pair to execute a trade on the Forex. Speculative currency trading, just like speculative stock trading, involves exchanging one currency for another in anticipation of a price change in your favor.

There are two types of traders on the Forex: consumer traders and speculative traders. A consumer trader wants long-term ownership and is not as concerned with daily price movements, whereas a speculative trader is only concerned with daily price movement, as that is where the profit potential is. Speculative traders are also called scalpers - they are trying to scalp a profit in a small price movement. Long-term position traders enter the market and stay in for a week, a month, or years. Short-term, or day traders, will enter the market for 5 minutes, 30 minutes, or even 4 hours, and then exit, but they are usually in and out within a 24-hour period.

Although brokers will assure you that Forex trading is commission-free,  it is important that you understand there still are costs involved. That cost is called the spread, which is what you will be charged to get access to the Forex market. The spread is the difference between the buy price and
the sell price of a specific currency.

Envision attending an auction where there are several buyers for a particular item. The auctioneer hopes to sell the item for $10.00 and has asked for bids. One bidder offers $4.00. The difference between the $4.00 bid and $10.00 asking price is $6.00, which is called the spread. As bidding gets closer to the asking price, the spread tightens up. When the bidding gets to $9.95, there is a $0.05 spread, and when the bidders agrees to buy it for $10.00 and the seller agrees to sell it, you have a transaction. There are spreads between all currency pairs that are traded, and they average 3 to 6 price interest points, or pips, on the major world currencies (which are considered to be the U.S. dollar [USD], the British pound [GBP], the Japanese yen [JPY], the European euro [EUR], and the Swiss franc [CHF]). The value of a pip averages about $10.00. Currencies from small countries are called off-brand currencies and can have spreads as much as 500 to 1,000 pips. The broker retains the spread, which is the difference between the buy and the sell price. This is done when a trader enters a trade and upon execution of the trade the spread, should the trade not go your way, is deducted from the trader’s account. Example: If the sell price is 4 pips lower, or $40.00 less, than the buy price, and you buy a currency and immediately go to sell it without any movement in your favor, you would lose $40.00, or 4 pips. To break even, the market would need to move up 4 pips in your direction. To make a profit, the market would need to move more than 4 pips in your direction.