Introduction to Forex Trading

Introduction to Forex Trading

Cory Mitchell, CMT

The currency or foreign exchange (FOREX) market offers many opportunities that other markets can not provide. The FOREX market is the largest of all markets, and is tradable 24 hours a day throughout the week. This market is probably one of the most exciting and chaotic markets, which offers ample profit potential but substantial risk if a proper trading approach is not used.

I truly believe everyone should be at least be minimally exposed to the currency markets. For long term investors this market offers diversification, hedging and large profit potential. For short term traders it provides a new market in which different strategies can be used to diversify the arsenal of techniques used. For short term traders who do not diversify their holdings, it is wise to diversify the strategies used so that a trader is not left with only one non-performing strategy/market should the markets change. With exposure to different markets and different trading techniques the trader will always have tools to use no matter what the market condition or how the market may change.

Choosing a Broker

First off you will need a broker. There are lots out there, and all them have their own advantages and disadvantages. Most of offer free charting, commission free trading and real-time support. The main differences you will find in brokers is “spreads” and the products they offer.

Spreads are how all Forex brokers make money. To to long a currency pair you buy at the offer price, and to short or exit a trade you sell at the bid price. Finding a broker which offers a low spread will save a lot of money over the long run. Also look at the products they offer. All brokers provide trading in major currencies as well many obscure ones. Where brokers differ is if they offer CFD trading. CFDs stand for Contract for Difference. CFD’s reflect the price of an underlying asset and the prices moves in direct correlation and magnitude as that underlying instrument. CFD’s are a contract between a trader and the broker. The difference in the price of the CFD when it is sold, from when it was purchased is what the traders makes (or loses). Basically it is exactly like owning a stock or futures contract, but without having to physically own the anything. Also, the leverage available on CFD’s is much more attractive than what is available on most physical markets. It is also nice if a broker offers simulated accounts (you can try out the platform with risking real money). I say only because it is good to get used to the platform before actually trading. Simulated trading is nothing like real trading, and does not reflect the emotions attached to real trading. So trading with real money is the only way to go in my opinion. Develop a trading plan and stick to it.

Here is a broker I recommend.

Forex Yard.

They offer tight spreads, you can open an account for as little as $100, provide daily analysis and offer trading in tons of currencies and stocks (via CFD) as well as Oil, Gold and Silver. Click on the link to check them out and open an account. If you open an account email me at cory@vantagepointtrading.com so I can help you out with becoming profitable.

Understanding the FOREX Market

The Foreign Exchange market is based on the simultaneous buying of one currency and the selling of another. This means that  a trend either up or down can be traded simply by interpreting which currency will continue to be weaker or stronger relative to the other. Currencies are available for trade 24 hours a day, 5 days a week. Being that the currency market is the largest market in world, with daily volume of over $1.4 trillion being bought and sold, the liquidity and time availability of trading makes it one of the most potentially lucrative markets available to anyone.

When you trade in currencies you are trading in currency pairs (one currency relative to another), thus when you buy a currency pair you are long the currency listed in the pair, and thus expect it to appreciate. If you sell the currency pair you are short, and expect the first currency listed to depreciate relative to the second. Since these markets trade 24 hours a day, profits/losses will fluctuate as the currencies values are always moving. Examples of currency pairs include the EUR/USD, USD/JPY and USD/CAD.

All markets have two prices at a given time. These prices are the bid and ask, which reflect the price buyers are willing to buy at and sell at respectively. When trading through a Forex broker if you want to buy you will need to purchase at the ask price, and if you want to sell you will need to do so at the bid price. The difference between the bid and ask is called the spread – this is the cost of your trade. Since Forex brokers do not charge commissions, this is how they make their money. For the trader it is imperative to find a broker that offers small spreads, as over time, larger spreads will significantly eat into profits. ForexYard mentioned above offers tight spreads.

Leverage is very common in the FX market, and this is why it is so popular among traders; arge returns can be made from a small investment. FX brokers will commonly give 100:1 and up to 400:1 leverage. This means that for every dollar you receive a minimum of $100 in capital you can trade with. Lets assume that you choose to have 100:1 leverage in your account, and you deposit $1000. You will have $100,000 in total buying power you can make money off of. To open a position worth $10,000 will mean that you put $100 in margin. This is your good faith assurance of the trade, and as long as you maintain a total of $100 in your account that trade can stay open.

A $10,000 dollar trade is called a mini lot and each pip movement will result in a profit or loss of $1.00 approximately (will be based on what currency pair you are trading). A $1,000 dollar trade is called a super-min lot and each pip movement will reflect a gain or loss of $0.10. A standard lot is $100,000 worth of currency and thus each pip movement is worth $10.00. Currency pairs differ in how much they move on average each day. Some currency pairs frequently see moves of 400+ pips a day where others will almost always be under 100 pip movements.

Brokers will commonly “roll over” positions in your account. This means that each day you will be credited or debited the difference in the interest rates of the currency pairs you are holding. This is not interest on your margin or the leverage your broker has given you. If one country has an interest rate of 4% and another has a 2.5% interest rate, this difference will be credited or debited from your account depending on if you are long or short the higher interest currency, respectively.

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