Forex Trading Tips

ForexTrading Tips

Foreign Exchange simply means the buying of one currency andselling another at the same time. In other words, the currency of one country is exchanged forthose of another.

The currencies of the world are on a floating exchange rate,and are always traded in pairs – Euro/Dollar, Dollar/Yen, etc.In excess of 85 percent of all daily transactions involve trading ofthe major currencies.

Last Updated - 20th September 2005

Four major currency pairs are usually used for investment purposes.They are: Euro against US dollar, US dollar againstJapanese yen, British pound against US dollar,and US dollar against Swiss franc. The following notationis used for these currency pairs: EUR/USD, USD/JPY, GBP/USD, and USD/CHF.You may consider them as "blue chips" of the FOREXmarket. No dividends are paid on currencies. The investment profitscome from well known "buy low - sell high".

If you think one currency will appreciate against another, you mayexchange that second currency for the first one and stay in it. In caseeverything goes as planned, some time later you may make the oppositedeal - exchange this first currency back for that other - and collectprofits.

Transactions on the FOREX market are fulfilled by dealers atmajor banks or FOREX brokerage companies. FOREX is the worldwide market, so when you are sleeping in the North America somedealers in Europe are trading currencies with their Japanese counterparties.Therefore the FOREX market is active 24 hours a day and dealers at majorinstitutions are working in three shifts. Clients may place take-profitand stop-loss orders with brokers for overnight execution.

Price movements on the FOREX market are very smooth and withoutgaps that you face almost every morning on the stock market. The dailyturnover on the FOREX market is about $1.2 trillion,so investor can enter and exit position without problems. The fact isthat the FOREX market never stops, even on the day of September-11,2001 you could obtain two-side quotes on currencies.

The currency (foreign exchange) market is the largest and oldestfinancial market in the world. It is also called the foreignexchange market, or "FOREX" or "FX" marketfor short. It is the biggest and most liquid market in the world, andit is traded mainly through the 24 hour-a-day inter-bank currency market- the primary market for currencies. The forex market is a cash (or"spot") inter-bank market. By comparison, the currency futuresmarket is only one per cent as big.

Unlike the futures and stock markets, trading of currencies is notcentralized on an exchange. Forex literally follows the sun around theworld. Trading moves from major banking centers of the U.S. to Australiaand New Zealand, to the Far East, to Europe and finally back to theU.S.

In the past, the forex inter-bank market was not available to smallspeculators due to the large minimum transaction sizes and often-stringentfinancial requirements. Banks, major currency dealers and the occasionalhuge speculator used to be the principal dealers. Only they were ableto take advantage of the currency market's fantastic liquidity and strongtrending nature of many of the world's primary currency exchange rates.

Today, foreign exchange market maker brokers such as FX Solutions areable to break down the larger sized inter-bank units, and offer smalltraders the opportunity to buy or sell any number of these smaller units(lots).

These brokers give virtually any size trader, including individualspeculators or smaller companies, the option to trade the same ratesand price movements as the large players who once dominated the market.Market makers quote buying and selling rates for currencies, and theyprofit on the difference between their buying and selling rates

Always use Stop Loss Orders. If you don't use them, it willkill you financially. We recommend stops 30 pips above or below yourentry price.

Don't loose more than 5%-10% of your total capitalin each trade. Adjust your stop orders and leverage if needed.

Let the profits run, cut the losses. Instead of using Take Profitorders, it's better to use a "Trailing Stop".If your broker doesn't support it, you can do it manually. Set thestop price at 30 pips (or the amount that you have chosen) above/belowthe maximum/minimum price since your entry. You will have to adjustthe stop level continuously, but you will get much better results.

Don't go against the trend. Go with the trend.

Capitalize well. Fund your account with enough money. Forstandard accounts, at least $5000 (for mini accounts $500).

It's less risky to don't let trades opened overnight. In addition,your Forex broker will charge you "interests" for openedpositions overnight.

Where is the central location of the Forex Market?
Forex Trading is not centralized on an exchange, as with thestock and futures markets. The Forex market is considered an Over theCounter (OTC) or 'Interbank' market, due to the fact that transactionsare conducted between two counterparts over the telephone or via an electronicnetwork.

Who are the participants in the Forex Market?
The Forex market is called an 'Interbank' market due to the fact thathistorically it has been dominated by banks, including central banks,commercial banks, and investment banks. However, the percentage of othermarket participants is rapidly growing, and now includes large multinationalcorporations, global money managers, registered dealers, internationalmoney brokers, futures and options traders, and private speculators.

When is the Forex market open for trading?
A true 24-hour market, Forex trading begins each day in Sydney, and movesaround the globe as the business day begins in each financial center,first to Tokyo, then London, and New York. Unlike any other financialmarket, investors can respond to currency fluctuations caused by economic,social and political events at the time they occur - day or night.

Is Forex trading expensive?
No. Most online Forex brokers allow customers to execute margin tradesat up to 100:1 leverage. This means that investors can execute tradesof $100,000 with an initial margin requirement of $1000. However, it isimportant to remember that while this type of leverage allows investorsto maximize their profit potential, the potential for loss is equallygreat. A more pragmatic margin trade for someone new to the Forex marketswould be 20:1 but ultimately depends on the investor's appetite for risk.

What is Margin?
Margin is essentially collateral for a position. It allows traders totake on leveraged positions with a fraction of the equity necessary tofund the trade. In the equity markets, the usual margin allowed is 50%which means an investor has double the buying power. In the forex marketleverage ranges from 1% to 2%, giving investors the high leverage neededto trade actively.

What does it mean have a 'long' or 'short' position?
In trading parlance, a long position is one in which a trader buys a currencyat one price and aims to sell it later at a higher price. In this scenario,the investor benefits from a rising market. A short position is one inwhich the trader sells a currency in anticipation that it will depreciate.In this scenario, the investor benefits from a declining market. However,it is important to remember that every Forex position requires an investorto go long in one currency and short the other.

What is the difference between an"intraday" and "overnight position"?
Intraday positions are all positions which are opened and closed anytimeduring normal trading. Overnight positions are positions that are stillon at the end of normal trading hours, which are usually rolled over byyour Forex broker (based on the currencies interest rate differentials)to the next day's price.

How are currency prices determined?
Currency prices are affected by a variety of economic and political conditions,most importantly interest rates, inflation and political stability. Moreover,governments sometimes participate in the Forex market to influence thevalue of their currencies, either by flooding the market with their domesticcurrency in an attempt to lower the price, or conversely buying in orderto raise the price. This is known as Central Bank intervention. Any ofthese factors, as well as large market orders, can cause high volatilityin currency prices. However, the size and volume of the Forex market makesit impossible for any one entity to "drive" the market for anylength of time.

How do I manage risk?

The most common risk management tools in Forex trading are the limitorder and the stop loss order. A limit order places restriction on themaximum price to be paid or the minimum price to be received. A stoploss order ensures a particular position is automatically liquidatedat a predetermined price in order to limit potential losses should themarket move against an investor's position. The liquidity of the Forexmarket ensures that limit order and stop loss orders can be easily executed.

What kind of forex trading strategy shouldI use?
Currency traders make decisions using both technical factors and economicfundamentals. Technical traders use charts, trend lines, support andresistance levels, and numerous patterns and mathematical analyses toidentify trading opportunities, whereas fundamentalists predict pricemovements by interpreting a wide variety of economic information, includingnews, government-issued indicators and reports, and even rumor. Themost dramatic price movements however, occur when unexpected eventshappen. The event can range from a Central Bank raising domestic interestrates to the outcome of a political election or even an act of war.Nonetheless, more often it is the expectation of an event that drivesthe market rather than the event itself.

How often are trades made?
Market conditions dictate trading activity on any given day. As a reference,the average small to medium trader might trade as often as 10 timesa day. Most importantly, because most Forex Brokers don't charge commission,traders can take positions as often as necessary without worrying aboutexcessive transaction costs.

How long are positions maintained?
Approximately 80% of all forex trades last seven days or less, whilemore than 40% last fewer than two days. As a general rule, a positionis kept open until one of the following occurs: 1) realization of sufficientprofits from a position; 2) the specified stop-loss is triggered; 3)another position that has a better potential appears and you need thesefunds.

What is a Limit order?
A limit order is an order with restrictions on the maximum price tobe paid or the minimum price to be received. As an example, if the currentprice of USD/YEN is 117.00/05, then a limit order to buy USD would beat a price below 117.05. (ie 116.50).
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What is a Stop Loss order?
A stop loss order is an order type whereby an open position is automaticallyliquidated at a specific price. Often used to minimize exposure to lossesif the market moves against an investor's position. As an example, if aninvestor is long USD at 156.27, they might wish to put in a stop loss orderfor 155.49, which would limit losses should the dollar depreciate, possiblybelow 155.49.

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