Nowadays foreign exchange market has become the most powerful and important market in the world. The Foreign exchange market impacts directly every obligation, equity, manufacturing asset, private property and any investments accessible to foreign investors. Foreign exchange rates play an important role in financing government deficits, equity ownership in companies and real-estate holdings. Foreign exchange trading helps to determine who owns the banks at which you maintain your corporate and personal accounts, and who hires and fires employees. The currency in your pocket is literally stock in your country, and like a share, its value varies on the international market providing traders with substantial opportunities for loss or profit.
Foreign Exchange - a brief history
In 1944, the Breton Woods Agreement was initiated in an effort to keep cash from draining out of war-ravaged Europe. Currency values were pegged to the U.S Dollar, which was then pegged to the price of Gold. In 1971, the modern era of foreign exchange first emerged with the collapse of the Bretton Woods Agreement. The U.S Dollar was convertible into Gold no longer, signaling an increase in currency market volatility and trading opportunities.
In 1973, the collapse of the subsequent smithsonian and European joint Float agreements signaled the real beginning of the free-floating currency exchange system that drives the markets today. As early as in the 1980's, computer technology extended the reach of the exchange marketplace. The values of the major world currencies became independent of each other, with intervention available to the states through the central banking system only.
Foreign Exchange Markets - Size and Scope
The Forex exchange market stunts growth of the combined operations of the New York, London, and Tokyo futures and stock exchanges. Daily turnover on the spot market is about US$ 4.5 trillion per day.
Forward outright FX trading and spot transactions take place in the inter-bank market. 51% of the market is in spot FX transactions and 32% of the market is in currency swap transactions. Forward outright FX transactions represent 5% of this daily turnover. Options on inter-bank FX transactions are making up 8% Thus, the inter-bank market accounts for 96% of the global foreign exchange market, 4% are divided among all the remaining global futures exchanges.
Frequently Asked Questions about Forex
What is Forex Trading?
Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange.
For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called going long the EUR/USD.
Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.
The Forex trading market is a multi trillion dollar market where world currencies are exchanged back and forth on a daily basis.
How is Forex trading done?
Retail currency trading is typically done through brokers and market makers. Traders can place trades through their brokers who will in turn place a corresponding trade on the interbank market.
Why do currency values change?
Currency values can change for many reasons. Sometimes they react to political and economic news, sometimes they are driven by speculators, and sometimes they are driven by international business flows. If companies in the United States are importing large quantities of products made in Europe, they will need to exchange their US Dollars for Euros to pay for the products. When this is done in very large quantity over a short period of time, it raises the demand for Euros and the value of the Euro versus the US Dollar increases. This happens because dollars are being sold on the open market, while Euros are being bought.
Is Forex trading risky?
Forex trading can be very risky. Currencies tend to be very volatile compared to other markets. The real key to success with currency trading is to use conservative risk management. There are many components to effective currency risk management, but the bottom line is to use caution and have a disciplined trading plan.
Who trades currencies?
Currencies are traded by individual retail investors, financial institutions, and corporations doing business. Retail investors and banks also trade to make profits and corporations usually trade in the normal course of the international business process.
How to Become a Forex Trader ?
Anyone with a little money and patience can become a forex trader. Despite the ease of getting into the business, there are a few steps you should follow. A hasty entrance into forex trading can lead to the poor house very quickly.Let's examine the steps for becoming a forex trader.
1. Trading Capital
Forex traders do not need to have a lot of capital to trade due to being able to trade on margin. The average forex broker requires at least $300 to open an account and start trading. A good rule of thumb is to have at least $1000 to open a mini account, preferably $2000. This number might sound a little high for beginners, but this will allow you to trade with a bit of a buffer in case of losses. 2. Open a Demo Account
A forex trading demo account is an a trading account with monopoly money in it that is connected to the live market. Trades can be placed in real time and represent what would be true losses and gains if the money were real. Before you put 1 penny on the line with trading, you'll need some practice. A demo account will give you the ability to practice trading without the pressure.3. Forex Training or Practice
Aside from practicing, you may want to seek some trading advice from a forex trainer or forex books. As a trader you will need to develop your own style and trading ideas, but in the beginning, it can be helpful to have some professional direction and recommendations. Forex is very daunting in the early days and some guidance can really help.4. Become Profitable
Before you actually commit to live trading and money on the line, you should be able to profitably trade on your demo account or with paper trading. Your track record should be more than a few weeks, at least 3 months, preferably 6 months. It will be difficult to refrain from trading after you make those first few profitable trades, but experience really counts in forex trading. It's something that you cannot work around, you have to get it the old fashioned way, hard work.5. Go Live
After practicing for several months, doing a little training, and getting some forex education and becoming consistently profitable, it's time to start making live trades. You may find that it's a little different to have actual money on the line, but if you stick to the same practices you used to be profitable while trading the demo account, you will be successful.Rules for Trading the Forex Market
The more you understand the forex marekts, the longer you will survive as a forex trader. Sometimes forex trading can feel like being in a war zone. Here are the 10 forex commandments to help you stay the course.
1. Don't start with just the minimum deposit required to open an account
Many forex brokers have a low minimum deposit required to open an account. The low amount of the deposit will usually cause you to open extremely large account positions in relation to your opening balance. This is a recipe for disaster. The goal of the typical forex broker is to get as many accounts opened as possible. They tend to set the bar really low on the opening deposits to meet their recruiting goals. Just because they tell you that you can control a trade of $10,000 on the market using only $50 in your $300 account doesn't mean that it's smart. Start out with a larger deposit, make smaller trades and you will have a much better chance of surviving.
2. Don't Buy Forex Software Without Researching it's Performance
Don't ever just run out and purchase forex software based on a high pressure sales page. Software that is truly valuable to forex traders will sell itself due to word of mouth. It will not need a high pressure sales page full of outrageous claims.
3. Learn to Use Stoplosses
Stoplosses should be a requirement for forex trading.You might think that you don't need stop losses because you understand the market, but no one is perfect. Stoplosses will protect you from having unlimited downside to your trades and allow you to move on to the next opportunity.
4. Keep a Trading Log
A trading log provides insights to your trading decisions after the fact. It might seem like a hassle, but it will provide insights to your trading patterns that you might not be aware of. Using a trading log will help you remember why you made your trades in the first place and that will help you learn the difference between how you planned a successful trade and how you planned a failed trade.
5. Develop A Trading Plan
Trading without a plan can lead to disaster. A trading plan can help you to keep your head together in the heat of the moment. Winning with forex trading is about the sum of your actions, not just making one large winning trade.
6. Don't Trade Too Large for Your Account Size
Trading too large for your account size can kill it fast. Placing large trades with a small account balance will cause large fluctuations in your account balance and that will make you nervous. It will make you happy when you're winning, but when you're losing you won't be able to think straight about trading. Always be adequately capitalized for the trades you place on the market.
7. Never Try to Pick Tops or Bottoms
It is so tempting to try to choose the point where you think a currency pair will turn around and go the other direction. If you manage to find any success at this, it's a great boost for your trading ego. However, more often than not, you will be wrong about the turning point of a currency pair and you will most likely keep trying to pick that top or bottom to prove yourself. This will only reduce your account balance over time. Stick with trading the trends.
8. Don't Add to Losing Positions
As a general rule of thumb, never add to your losing positions. Adding to losing positions only increases your rate of loss as the market moves against you. Your risk will continue to get bigger and bigger until you either wipe out your account or get nervous and close the trades for a large loss.
9. Don't Over trade
Sometimes there isn't much "tradeable action" and you will feel the urge to trade anyway. Avoid this by finding something else to to. Forex trading does not require watching the markets all the time to catch opportunities. You won't be able to catch every opportunity anyway. Don't trade just for the sake of trading.
10. Keep Your Eye on the Bigger Picture
No matter what time frame you are trading on, it's good to know what is happening on the daily charts. Understanding the larger trends in the markets will allow you to be more decisive about your trades in the lower time frames and will help you maintain a more clear perspective. Trading with the overall trends will increase your odds for success
