First off, I should state that I do not trade forex. I am very familiar with the subject and I do trade options and futures that include foreign currency etfs, but I do not trade the currencies themselves. I get asked about forex trading a lot, so I decided it would be worth addressing it here.
Forex trading is the trading of foreign currencies, whether you are buying a currency as a long term investment vehicle or trading it with the hopes of making profits off the fluctuation in its value. The currency market has become huge since its creation in 1971, and it is now the world’s largest financial market. This article is intended to help you determine if forex trading is for you.
Forex trading is also known as currency trading, but as you will see, there is more to it than simply buying and selling currencies. Currencies can be bought through the trading of them on Forex exchanges or through the purchase of foreign currencies at the bank. Trading currencies is essentially gambling on the value of them rising and falling. Trading on the other hand is a simple way of hedging your bets whether you are a long-term investor or just looking to speculate.
The basics of Forex trading are relatively simple, but there is obviously a lot more to learn. Therefore, I am going to split this article into 3 parts: Forex Basics, Forex Trading Techniques and Forex Trading Strategies.
The Forex market is the largest financial market in the world, accounting for 1.3 trillion worth of trading activity in 2011. However, it is best to remember that Forex trading is really only a small part of the financial world. It is estimated that 53% of the world’s money supply is in the hands of Forex traders. A very small percentage, but a large amount all the same.
Before you invest in Forex, it would be good to know what it is you are investing in and why. Forex trading connects almost every part of finance into one place, including stocks, bonds, commodities and more. Thus, forex trading is not merely buying and selling currencies for profit. It is a way to invest in the financial world as a whole. The simplest way of investing is through something called “spot trading”, which we will get to later.
There are very few people who set out by simply buying and selling currencies with the hope of making a profit, especially if they don’t have deep knowledge of how Forex markets work. As well as those who choose to do this, there are some who choose to take the other approach, that of “day trading”, and so on.
As a result of that, you will find that most people in the Forex world are involved in one of these two methods. Either they trade currencies as a long-term savings vehicle, or they trade currencies as a way to make quick profits. There are also those who lose on both the short and long term. They lose in their sleep and wake up with no idea what happened to their money.
Forex Trading Techniques
A Forex trading technique is the way in which you trade a currency. For example, you can buy or sell currencies to make profit off their movements. As well as this, you can trade currencies to become a less risky long-term investor. In addition to this, there are those who just day-trade, where they hope to make profits by purchasing a lot of currency at one time and selling it all in one go for big profits.
There are many ways of trading, all of which have their advantages and disadvantages. Depending on your style, you will need to choose a Forex trading technique.
*Exchange Traded Funds (ETFs) are index-based funds that trade like stocks on the Forex market. Their values rise and fall by 1% to 10% in a daily basis depending on the index they represent. There are ETFs set up to track the movements of the major Forex indexes, including the Dow Jones Industrial Average, S&P 500 and FTSE 100.
*Intraday trading is when a Forex trader trades just one currency within a specific time frame. These brokers usually give traders only a few minutes to make and execute trades, as opposed to online banks or brokers that may give you days to do so.
*Spot Trading is when a trader buys a currency with the intention of selling it back at a higher price. This in itself is a very risky investment strategy, and requires strict attention to the market to be successful.
*Forward Contracts are when forex traders agree on the sale or purchase of one currency for another at an agreed upon date at an agreed upon price. This contract can either specify the dollar amount or the number of units of currency to sell or buy.
Forex Trading Strategies
The Forex trading strategies are the methods used by traders to make money on the Forex markets. There are literally thousands of these strategies, and they can vary from less complex to very sophisticated. However, it is important to understand what is required for any Forex strategy to work in order for it to be successful.
*Stop-Loss Orders are placed when a trader believes that a currency will fall beyond a certain point in value and needs to be stopped before this occurs. When this happens, the stop loss order is triggered and the Forex broker gives you the right to either buy or sell your currency back at a certain price or lower.
*Trailing Buying is when a trader buys a currency with the intention of selling it later at a higher rate. Trailing buying strategy was used by different traders around the world pre-Forex, and was still being used up until a few years ago. It is also known as “Day trading”.
*Trailing Selling is the opposite of Trailing Buying, and it has a different goal. In this, a trader sells a currency with the intention of buying it back for less. This opposite Trailing Buying was also used before Forex but never gained popularity. Some say that it was just too complicated.
The Risks of Forex Trading
There are risks that come with trading the Forex market, and it is important that you know what they are.
*Risk of Comeback and Downturns is when a currency loses its value in value and it seems impossible to recover. This usually happens when a currency has recently been up significantly, due to an economic reason. When it begins to fall again, there is a risk of reversion, where the rate will revert back towards its original value.
*Risk of Lack of Regulation is due to the Forex market being unregulated and unmonitored, it is very easy for anyone to fall victim to a scam or other unscrupulous practice. This risk is much reduced by using regulated brokers.
*It is very easy for anyone to fall victim to a scam or other unscrupulous practice on the Forex market. This risk is also much reduced by using regulated brokers.
Conclusion on Forex Trading
Forex trading can be quite confusing, especially for a beginner. However, it can be, for a select few a very profitable way to make a living and the benefits are there for everyone to see. If you try Forex trading, I strongly suggest that you start with regulated brokers and avoid scam sites. Also, make sure that you know what you’re getting into.
By starting with small investments or demo accounts, you can fully understand Forex trading before risking your own money into it. Once you have a grasp on it and feel comfortable, then use your own money.
I also recommend watching a few FREE webinars on Forex before making your final decision about whether or not to trade the Forex market.