Forex Trading

There are two ways of analyzing forex trading — fundamental analysis and technical analysis. Whichever system you use will have a considerable impact on your trading experience. To help you choose, here are some advantages and disadvantages of each.

Fundamental Analysis

Basically, you have to understand that the movement of currencies is influenced by several fundamental factors such as economy, political situation, government policies, and interest outlook. If you analyze forex trading based on these fundamentals, you will have, more or less, a clear picture of your trading situation because currencies usually behave in accordance with the political and economic environments.

However, there are drawbacks in fundamental analysis. For instance, decisions are often influenced by human emotions, such as greed and fear.

Once in a while, or sometimes, every so often, price spikes occur, and as to when they do cannot be determined by these fundamental factors. The advancement in communications technology worsens the scenario.

Technical Analysis

On the other hand, technical analysis takes into consideration not just the fundaments, but also the emotions that influence the trader’s decision. Simply put, using technical analysis, you can determine the price.

This system enables you to look at your trading situation clearly, while at the same time saves you time and effort, and keeps your emotions at bay.

Unfortunately, for technical analysis to succeed, you have to make the odds work to your advantage.

Majority of forex traders prefer using technical analysis over fundamental analysis. It is more efficient and more beneficial to the trader, as long as you understand its capabilities and limitations and be able to capitalize on them. Indeed, if you want more money or more successful forex trading, technical analysis is the better choice.

Before deciding to get involved trading in the forex market, you would have to choose a competent forex broker who can offer wise advice about the steps you will need to take. Consulting with a broker will literally make or break your chances at forex trading. When choosing the right online forex broker, consider the following factors:

1. Safety of your funds. Online forex brokers usually follow a set of stringent regulatory rules that have been given to them by the authorities in the country where they are licensed to practice. You need the assurance that your funds are insured, and that the extent of the insurance is adequate. The level of strictness in regulation rules vary across different countries, but they are especially more stringent in countries such as Switzerland, United States, Canada, and Australia. When choosing your forex broker, research about the regulatory authority that gave the rules the broker is abiding by. If you find out that your desired broker is not under any regulatory authority, it may be best to look for another one.

2. Proper execution. You should also examine the business models that your prospective forex broker follows. Some forex brokers are market makers, others specialize in electronic communication networks. A broker may also offer automatic execution. If your prospective broker does not offer this, find out the average rate of execution.

3. Platform for trading. Trading platforms online may either be web-based or downloadable. These platforms should be stable and fast enough to cope with high volumes, especially when the market is moving at a fast pace. A good trading platform can offer breaking news and charts that are relevant to the market, and you may even be offered to experience the platform first hand by handling a demo account before you will be allowed to trade live.

4. Size of the account. A number of brokers may institute a minimum account trade size in order to trade. Others already have a standard lot traded, and you may not be allowed to adjust this size. Still some may offer standard and mini accounts, both having a minimum balance to open the account for trading.

5. Spread.Fixed spreads are those that do not fluctuate during the day, while variable spreads become wider when the market becomes more volatile, thus the market needs to move in your favor before profit can be enjoyed. Tighter spreads are good in forex trading, and if you do not want to risk so much, choose brokers that use fixed spreads.

6. Commissions and Margins. Some brokers take a percentage off your earnings as their commissions, while others have commissions built into the spread they use, since this is how they make money anyway. In addition, you should also find out about the margin requirements of your forex broker.

7. Support. Choose a forex broker that can provide you with adequate support. Some may contact you via e-mail only, while others stay on the phone for the whole 24 hours just in case your internet connection is disrupted at a crucial time.

The financial world is rife with transactions that may be influenced by a single individual or event. Perhaps the single market that is indifferent to these outside forces is the forex market. No single entity or event can influence how this market moves because of its rapid pace, sheer size, and volatility.

In order to trade successfully in the forex market, you will need solid knowledge and good judgment. This article lists some tips you can use to reduce your risks while still making profitable trades.

1. Practice. You could suffer big losses if you enter the forex market unprepared, so it is best to practice on a forex demo account for a minimum of two months. One good way to avoid this is to practice without risking actual money first.

2. Look to the future. The forex market does not operate on a small scale. To conquer this market successfully, you need to look at bigger time frames. To illustrate, suppose that you decide to trade now, instead of looking at what trading will look like in 20 minutes, look at charts that indicate hourly activity. This will give you an idea about the price movements in one day or in one week.

3. Stop-Loss and Take-Profit orders. Generally, the rule is to set your stop-loss order closer than the take-profit order to the opening price. By doing this, you do not always need to make the right call before you profit.

4. Immobility is a good thing. If you are in doubt, don’t trade. This is perfectly legal, and it could produce better results in the long run. If you are unsure about the trend of trading, stay out of it. This way, you can save your present capital.

5. Aim for no stuck money. The market will not favor you just because you will it to; if you progressively lower your stop-loss threshold, you are progressively increasing the amount of losses. Your money becomes stuck for an indefinite span of time, thus it will be wasted.

6. Proper timing. Trading forex on Mondays is risky because a newly opened market is still establishing a trend. Trading on Fridays may be risky as well because of the huge amounts of closing trades. It is best to set the middle days of the week (i.e. Tuesdays to Thursdays) as your trading days.

7. Measuring success. Look to the long term when judging how successful your calls are. These should be measured daily, weekly, monthly, or yearly in order to put it into context with other trends and calls. A single trade does not automatically signify failure or success. You do not even have to win every time you trade. What is important is to establish a slow but steady profit flow to benefit you later on.

Leverage trading, which is more commonly known as trading on margin, simply means that you don’t have to put up the full amount or value of the trading position.

One of the main differences between forex trading and stock trading is that forex offers more leverage, which is up to 200 times according to the value of your account. This also means with more leverage there is an increase in risk as well.

Majority of online forex brokers allow margin trades at a leverage of 100:1 (1%). This would mean if the forex trader’s opening position is $100,000, an investment of $1,000 would be required while the rest, $99,000, would be on borrowed capital. This type of leverage can maximize profit potential but at the same time there is potential for loss too. A forex trader newer to the fx markets would be wise to start with a leverage of 20:1.

In forex trading there are no debit balances, therefore no margin calls. Forex brokers usually allow risk only to the funds that are on deposit. Since there are no margin calls and for protection purposes, forex brokers will close out all positions automatically if the value of the position decreases significantly. This way you won’t risk more money than is in your forex account.

Having leverage gives more opportunity for making money but at the sametime there is more risk involved. You can downside this risk by limiting orders and placing stop-loss orders on all positions you have open.

A foreign exchange market quote can be easy to read if two things are always remembered:

* The base currency is the first currency listed
* The base currency’s value is always 1

Forex quotes usually revolve around the US dollar which is considered as the base currency. The quote is shown as what the US dollar would be worth in the other currency. For example, a quote indicating USD/JPY 109.38 would mean that 1 US dollar is equivalent to 109.38 Japanese yen.

If the base currency is USD and the quote goes up, that means the US dollar has gained strength in value and the other currency has weakened in value. When quotes rise, the US dollar can purchase more of the other currency than previous.

There are three exceptions when it involves major currencies which are not based on the US dollar. These include the British pound (GBP), Euro (EUR) and Australian dollar (AUD). In this case you may see a quote such as EUR/USD 1.4908 which would mean 1 Euro equals to 1.4908 US dollars. When the US dollar is not the base currency, the rising quote means that the US dollar is weakening and therefore less of the other currency can be bought than before.

Currency pairs not involving the USD are considered cross currencies, although the idea is still the same. An example is GBP/JPY 204.68 which means one British pound is equal to 204.68 Japanese yen.

Just like other financial markets, forex quotes have two sides which include the bid and ask.

* Bid is the price the base currency can be sold for (SELL)
* Ask is the price the base currency can be bought at (BUY)

Since forex trading prices can be significantly liquid, they are quoted in very small increments which are called pips (percentage in point). The 4th decimal that points out or 1/100th of 1% is referred to as a pip. The only exception is the Japanese yen, where pips refer to the 2nd decimal point instead of the 4th.

Forex or FX is short for foreign exchange. Forex is an international currency exchange market where money is sold and bought. Participants of the market determine the price of one currency against another according to supply and demand. It is the largest liquid financial market and 95% of the trading occurs from profit-seeking speculators.

Currency is traded in pairs, for example US dollar against Japanese Yen (USD/JPY). There are no limits to how long you keep your position, as you can open and close in a few seconds to even years. Unlike stock market trading, there isn’t a central location or exchange for forex trading. Transactions occur daily over a 24 hour period due to all the different time zones across the world.

Forex currency trades can be processed either over the phone or electronically. There are many online forex brokers to choose from. Most offer demo accounts, which is great for beginners, as you can test and learn the forex trading system without investing any real money at first. There are also numerous forex tools and automated trading softwares to help both beginners and advanced traders to analyze and catch the signals for profitable trading.

The forex market’s daily turnover is trillions of dollars; therefore there is potential to make money. As in all investments there are risks involved and steps should be taken in order to minimize these risks. First is to gather as much information and learn all about trading the forex market. Secondly, start with a demo account until you get familiar and are showing profitable trades. Then when you activate a real forex trading account, start with small investments to make smaller profits, and risk only those profits for any larger trades, always protecting your initial investment.

*A few popular automated forex trading softwares for beginners and average traders include: Forex Killer, Forex Tracer and Forex Funnel