Review Category : Trading Education

Economics and Currency Trading

Currency trading

Currency trading is probably one of the most exciting financial markets to get involved in. Not only is it the biggest in the world but it also has something that other markets do not: a beat on the true pulse of the world’s economic heart. There are some interesting results to having a touch on the economic pulse of a country. You get the opportunity to tell if a country is doing well, if it is climbing out of a recession, or heading towards one.

The process involved in currency trading is not difficult. The majority of the investment process is automated. You set up your accounts. You set up your orders either through a broker or through a software application that connects to a trading house and you trade. While this particular part of the process is not difficult, it does take some research, experience and education to be able to set up trades if you are an independent trader or give educated, solid orders to your broker.

Currency Trading Investments

Hearing that currency trading helps support economies may sound like something you might hear from a broker or trading site looking to get people to invest, but it does have some basis in fact. The currency exchange and trading on it helps to create a vital part of the economic cycle.

Investing or trading in a country’s currency shows faith in the country and in turn helps to strengthen the purchasing power of the currency. Purchasing power is an essential part of the economic cycle because it helps to determine what can be obtained with a given unit of currency.

For example, if ten years ago $1.00 bought two loaves of bread and today it takes $1.50 to purchase a single loaf then the economy has weakened and so has the economy’s purchasing power. This can translate directly into currency trading.

Currency Trading Purchasing Power

Trading in currency deals directly with purchasing power. When you trade in currency, you are trading one unit of one country’s currency for an equal amount of a different currency. The difference is where a currency trader takes their profit or their loss.

Currency trading involves predicting market movements that will provide you with more units of currency than you originally invested, whatever the currency you are trading in. Not everyone trades in their home currency and there is nothing that states you cannot trade multiple currency pairs at the same time. This is one of the things that make trading on the foreign exchange so appealing. There is a lot going on and it is more than just a wait and see. The market is highly responsive and keeps traders on their toes.

Currency trading is part research, part luck, part experience, and part willing to take a risk that goes with any type of investment. Experience can help to reduce the risk and increase the chances of success. Consider the challenge and thrill as well as the benefits that come with supporting economies, both your own and countries whose economic standing has an effect on your own.

 

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Developing your Forex Trading Strategy

Forex

Forex day trading has evolved greatly since it first became available to the public and was greatly facilitated by the advent of digital platforms. Forex trading was first launched in 1975 as a means of trading stocks and currency, back when the SEC agreed that fixed commission rates – formerly set at 1pc of each trade – were not legal. This allowed brokers to offer lesser commission rates and opened up the market directly to amateur and professional day traders alike.

Different Forex trading strategies

There are a multitude of strategies for day trading in forex. Some are particularly unique to daily forex trading activity and others follow more general patterns of broker-driven trade activity. Essentially the driver behind each approach is to maximise profits, by making advantageous bets against micro price movements in currency indexes and exchanges. Often, traders will leverage additional capital – sometimes in large sums – to access greater funding to place their trades and potentially realise even greater gains (however, the reverse situation – of magnified losses – is the flipside risk of leverage).
When you look at your strategy, consider first your entry approach. You will want to select financial instruments that work best for day trading. Forex is ideal for this, as currencies are both volatile and liquid. Liquidity is important as it gives you the opportunity to buy and sell with a tight spread and the right price. Volatility measures price movements within a day and can lead to potentially bigger gains or losses, depending on the movement.

Decide your approach to risk and whether you wish to simply trade with your own money – particularly whilst you are building up knowledge and experience – or whether you plan to leverage your bets by borrowing capital. This approach is generally recommended for more experienced day traders. It is also wise to research the different approaches to market analysis, such as learning to read trend lines and candlestick charts. Another important approach is to stay up to date and current with the latest financial news, as this will provide you with vital broader context as well as data around market movements. Day traders can also use online platforms to see where orders are popular within the market and see how volumes are being affected during the day.

Stop losses

This is another important strategy for day trading. When you are trading on a margin, you accept risk, as price movements can be steep. However, by setting a stop loss, you can limit your potential loss by triggering a stop-point at a pre-arranged price, where the trade will cease. The trick is to pick a price that suits your tolerance and appetite for risk. This stop loss can either be set up directly via your platform, or it can be a mental strategy that you employ to guide your decision making. This approach can greatly lessen stress and worry and it is a popular approach for more experienced Forex traders. Novice traders are at more risk without this approach, as they often refuse to stop trading when they experience a loss and take extra risks to try to break even – potentially further worsening their position.

 

 

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Understanding the Basics of Forex Vocabulary

forex

To a beginner, trading on the Forex, or foreign exchange market, can be a daunting prospect, not least for its many exclusive terminologies and terms. However, this initial complexity need not be a deterrent. If you are just starting out in the market there are a number of easy-to-understand basics that can make your first steps simple ones. Below are a handful of words that are vital to any successful foray into the Forex world.

Currency Jargon

Before you start, it is imperative you know what it is you are actually trading. The Forex market has eight main players, known as ‘majors’, which are the world’s most traded currencies. These eight comprise of the Euro, US Dollar, Japanese Yen, British Pound Sterling, Swiss Franc, Canadian Dollar and Australian and New Zealand Dollars.

Each of these currencies also has its own nicknames that are commonly used amongst traders on the market. The GB pound is also known as the ‘cable’ and the US Dollar as the ‘buck’ or ‘Greenback’ while the Canadian Dollar is generally referred to as the ‘Loonie’. Easier to decipher are the ‘Aussie’ (Australian Dollar), ‘Kiwi’ (New Zealand Dollar) and the ‘Swissie’ (Swiss Franc).

Basic Terms of Play

Once you have understood what you are trading, it is important to then get a grip on the lingo associated with the forex trading process itself.

Currencies on the Foreign Exchange are always traded in twos, with each coupling known as a ‘Currency Pair’. In any listed pairing, the ‘Base Currency’ is the first listed in the quote, whilst the second listed currency is known as the ‘Counter Currency’. Each piece of currency is known as a ‘Unit’, with a ‘Lot’ representing the amount of a base currency to buy or sell.

The ‘Ask Price’ is the price at which currencies are bought, shown at the right side of any quote, while the ‘Bid Price’, on the left side of any quote, is the price at which each currency is sold. The ‘Bid/Ask Spread’ is the difference between the two and represents the amount made in broker’s fees.

One word that arises frequently in any Forex discussion is ‘Pip’. A ‘Pip’, which stands for ‘percentage in point’, is the smallest price change that can occur between any currency pair. For most currencies, this is 0.0001. The Pip can be measured either in terms of the currency or in terms of the quote and it is this that is used to calculate any profit or loss that a trader may make on the market.

 

 

 

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Foreign Exchange (FOREX) Trading

forex

Forex trading (also known as the Foreign Exchange market, fx market and the Currency market) involves buying and selling foreign currencies. With trading volumes of between $1.5 and $2 trillion US dollars every day, it is the largest worldwide investment market, with vast numbers of traders all buying and selling identical products.

Unlike stocks, the focus for fx trading is small. Trading on seven major currencies makes up 85% of all transactions. Leading broker centres are found in London, Tokyo, New York, Singapore, Frankfurt, Hong Kong, Zurich, Sydney and Paris.

Benefits of Forex Trading

The fx market is considered extremely accessible. There are minimal barriers for participation and with no charge for brokerage, the cost of transactions is relatively small. It is easy to source relevant data to assist in decision making, especially as many brokers are happy to provide necessary information free of charge.

Forex trading is an Over-the-Counter (OTC) market and as such, the only tools required to participate are an Internet connection and a computer. Transactions can be carried out via a broker websites, phone, fax or email.

It is possible to trade with limited capital and the trader remains in full control. Funds can be accessed at any time as there are no tie in or holding periods. As in all trade, risk can never be completely eliminated, but this does help to keep it as low as possible. Investors can open a ‘mini’ Forex account with as little as $100.

How Trading Works

Currencies are traded in twos. Four main currency pairs used are: Euro/US Dollar (EUR/USD), US dollar/Japanese yen (USD/JPY), British pound/US dollar (GPD/USD) and US dollar/Swiss franc (USD/CHF). Dealers based at Forex brokerage companies and major banks will carry out transactions. The execution of these is very nearly immediate.

Due to the high levels of liquidity in the markets and in contrast to trading stocks, Forex trades utilise high leverage. Typically this can be 100:1. As a result, $1000 investment will enable the investor to take control of $100,000 and consequently potential return increases.

Political and economic factors will cause currency price fluctuation. These include International trade, political instability, interest rates and inflation.

Trading on the Forex market may be open to all, but it is certainly not as easy as it might first appear. It requires commitment, discipline and a lot of patience. It is important to become as knowledgeable as possible before beginning to trade. It is certainly possible to make a profit, but that is not to say it isn’t also hard work.

 

 

 

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Forex Trading: A Valid Career or Simply Gambling

Trading

Trading on foreign exchange markets is seen by some to be a good and valid way to make a living, but by others as simply another way of gambling. In reality it is the approach of the individual trader that makes the difference as to whether they are merely gambling or not; it is the set-up and strategy used to determine when trades are made that makes the difference between a gamble and an informed decision.

Types of trader

There are two main camps of Forex traders, those that look purely at mathematical trends in the markets and the numbers around the changes and fluctuations in exchange rates and those that take into account what could be called the larger picture and include global events, news and other relevent factors. The former groups are generally known as technical traders, where the latter are called fundamental traders, but it is unlikely that a trader in real life will follow one or the other with compete exclusivity.

How to choose?

A new trader will have little chance of becoming instantly successful; the best way (and really the only sensible option) to begin a trading career is to use a dummy account first, for as long as it takes to begin making a profit consistently. This allows you to create a model for yourself and begin to learn how to read the trends in the market and therefore the best times to buy and sell, or the limits and stop levels that you set yourself or a trading robot if you decide to use one. Initially reading and learning the trends in the market will be the main focus, but keeping an eye on economic and news items that affect the markets is also important, although at first it will be unlikely that you will be able to spot an effect before it happens.

In reality it is likely that a trader will use charts and trends as a basis for creating a trading model, while building up knowledge about external factors that can affect the currency markets. There are a number of unforeseeable events that can have a major effect on the markets such as natural disasters and this is the reason why limits and stops are vital, especially for a new Forex trader so that you do not lose everything in an unpredictable crash.

Overall a new trader needs to begin with a dummy account, build a method and learn how to predict future movements, but always remember to limit losses and follow their method scrupulously. If these steps are adhered to, Forex trading becomes a viable career rather than a gamble.

 

 

 

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The Determining Factors of the Forex Market

forex

You do not have to be an expert in the forex markets to know that currency rates are in a constant state of flux, with values seemingly changing at the drop of a hat. One minute a national currency is performing strongly and on the rise, the next it is starting to struggle and lose ground against other currencies. Just what are the main factors which come into play when it comes to the forex markets? Here are some of the more common reasons for value changes.

Politics

Perhaps not surprisingly, the field of politics is probably the biggest determining factor when it comes to forex rates. Government budgets, trading policies and political stability all have a huge influence over foreign exchange rates. For instance, a country which exports more than it imports will have a strong national currency rate, while countries which have trading deficits will find their currency weak compared to its competitors.

National elections often have an impact on the markets, particularly if the final outcome of that election in in doubt. A close election, where the result is in doubt right until the closing stages, is seen as possible political instability by the exchange markets, causing the currency to fall in value. Conversely, if it looks like the current Government is going to stay in power, the status quo will have a stabilising effect on the currency rate.

Inflation Rates

The rate of inflation in a particular country will have a large bearing on the perceived strength or weakness of the national currency. High inflation rates will usually see a decrease in the value of the currency.

World Events

Along with politics in general, world events are a huge determining factor for forex rates. After all, the foreign exchange market covers the entire globe, so an impending crisis can have an immediate impact on rates. A good current example is the escalating crisis in Syria. With a possible interruption to oil supplies from the Middle East, much uncertainty will grip the foreign exchange markets.

Apart from the obvious devastating effect war can have on human lives, the uncertain future of a nation gripped by war means its currency value will normally plummet and have a knock-on effect on foreign exchange markets around the globe.

When all is said and done, traders on the forex market are in the predictions game. Their job is to try and forecast future events which, of course, is not an easy thing to do.

 

 

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Spending Abroad and the Forex Market

forex

How can you negotiate the Forex markets to avoid spending unnecessarily on fees or bad exchange rates when traveling or sending money abroad?

Use credit cards

But not just any old card! Your average credit card company will add a 3% charge for foreign usage. However, there are specialist cards available that don’t penalise customers using them abroad, so you will only be charged the standard bank Forex rate ? this makes these cards even better value than getting cash at a bureau de change.

Nonetheless, the usual credit card costs apply, so stick to just one of these, strictly for use abroad, and always repay the balance in full or you will be charged interest.

Avoid airport currency exchanges

Airport bureaux de change tend to be the most expensive place to buy money. Airports and ferry terminals alike know they’re your last chance and so can get away with offering the worst deal. If you have no other choice, at least try and pre-order as this can sometimes be done at more generous terms.

Beware debit cards

Similar to credit cards, only specialist debit cards are worth using abroad. Your average debit card Forex rates are less than generous and are made worse by the addition of a transaction fee, usually about $1.50 a time. Do your research to find an account offering generous terms when using your debit card out of the UK.

Choose your payment currency

In many larger resorts or busy tourist areas you may be given the option to pay in Euros or in Sterling. If you choose Sterling you will be subject to the retailer’s choice of exchange rate, usually lower than the bank exchange rate at the time. If you have armed yourself with a credit or debit card with generous terms for foreign use, you will get a much better deal by opting to pay in Euros. If you are subject to a loading fee when using your card, you will have to try and work out for yourself which option gives you the best deal.

Watch out for cash withdrawal fees

When withdrawing cash with a credit card, you will always be charged a fee. This applies not just at a cashpoint but also when buying from a bureau de change. To avoid this, buy your foreign cash with a debit card or with cash in your home currency.

Bureaux de change are not protected

If you are in the habit of using bureaux de change to buy money in advance, you have no protection should the agency go bust. This is not a problem if you are doing an instant currency exchange, but if a bureaux is holding your funds for any reason, such as advance ordering or large transactions, you will lose your money if the bureau folds.

 

 

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The Secret to Confident Forex Trading

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When you play cards, how good is your poker face? When times are tough, how steady is your hand? When you find yourself in a stressful situation, how clear is your head? If you can bluff with ease, keep cool in a crisis and not display any sign of nerves under pressure, then you could be ready for a new challenge in trading on the Forex market.

However, if you are somebody who finds your palms sweating at the first sign of trouble, who shakes like a leaf when you’re nervous and who finds yourself getting stressed at the small stuff, then it probably isn’t for you. That’s not to say one personality type is better than the other  in reality, most of us display traits of both but essentially, trading on the foreign exchange isn’t something that is suited to people who tend towards over-emotional behaviour.

Tough cookie or soft heart?

Forex Trading is extremely rewarding sometimes financially, sometimes mentally it is challenging and it is tough. You will need to accept that there will be times you suffer losses and sometimes these will be substantial but you need to also realise that there will be wins and when these happen it is worth the effort. An emotional player will flounder when they are losing, start to trade erratically and end up losing big. A cool customer will carry on playing just the way they always do, not letting the system get to them, and most likely end up a winner.

Get to know yourself

So, what’s the secret? Well, it is hard to change your habits  and being emotional isn’t a bad thing, so not something you should really seek to change. But you can identify your weaknesses and establish a pattern of Forex trading which works for you. Before you start trading with real money you need to open a demo account using dummy funds and research as much as you possibly can about the markets. Learn the best times to trade depending on time zones the types of currency on the market, the fluctuations and patterns that successful traders see. Develop your own system based around what you can afford to lose and never deviate from it. This is where your steady hand and your patience will pay off, as you can be fairly reassured that your system will work as you will have proven during your dummy account days. Don’t be tempted to leave a currency too early or buy in too early (or late) and have faith in yourself.

If you find yourself wobbling then you could keep a diary. It may be that you’re under pressure in other areas of your life family perhaps or that you haven’t been eating properly or getting enough sleep. All of these can affect your frame of mind, so look after yourself physically and mentally and your Forex trading should stay sharp and unaffected.

 

 

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Learning to wait when Trading

Trading

Success in foreign exchange trading is, like many high-stakes markets, reliant on the instincts of the individual trader. This takes many forms. A major part of it is the ability to make educated guesses about the future, whether a particular currency will rise or fall, and the ability therefore to read patterns in the changing fortunes of any one particular unit.

As valuable as this is, much of its potency is lost if it is not coupled with a good sense of timing. Deciding when it is the right time to make your move is crucial to maximising profit or, in less fortuitous circumstances, minimising loss. One aspect of this is being able to make a split-second decision and jumping in when the odds are in your favour, but perhaps a more difficult element is exercising patience. The following article explores the value of patience in forex trading.

Holding back and reining in

The fast pace that is associated with trading in many markets can often appear to naturally reward those who act with knee-jerk reactions and do not hang around to see how things resolve themselves. Although there is some credit to be attached to this, the virtue of patience is much more valuable, in no small part because it is so rare and requires some real talent to develop and master it in an effective fashion.

It is quite common for a trader to sell urgently when a currency does not behave in the way they predicted, going for a lower point and doing no good. This is an example of emotion dominating a trading technique and this cannot be permitted if you are to succeed. Denying that need for a quick result, learning to hold back and rein in your instinctive urges are the most important techniques to develop, and patience is integral throughout. The best way to utilise patience in foreign exchange trading is to set up your own personal rules.

Play by the rules

If you have a set of rules to govern your decision-making when you are playing the market, and you can be sure that you will adhere to them, then you can avoid the pitfalls of sudden reactions and rushing into rash decisions. Granted, this is easier said than done, but there are some simple steps to help employ patience to your benefit.

Firstly, decide what kind of profit you are aiming for. Small-scale traders can therefore feel content to sell as soon as they see even a slight rise in their chosen currency. Meanwhile, those hunting for a bigger profit have to be prepared to accept greater risks and here patience is especially crucial. If at first your currency declines, don’t jump ship immediately but ride the wave and see if it increases, bringing you back into the regions of big profit. Another tip is find ways to take yourself out of the intense arena of trading. For instance, examine graphs or predictors as this will help slow your reactions and allow more time for contemplation.

Overall, nowhere is patience a greater virtue than in the fast-paced, risky world of foreign exchange trading. Taking your time will help to make your trades less stressful and more profitable.

 

 

 

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Treating Forex Rates like An Expert Trader

forex rates

One of the reasons why individuals are attracted to the forex market is that they hear about the kind of money that experts are drawing from fluctuating forex rates and want to get in on the action as well. However, what these individuals fail to realise is that expert forex traders are a class above the rest of the crowd active in the forex market.

While it is true that they do not do anything different from other forex traders, it is also true that the style with which they do what they do is completely different. Essentially, expert forex traders know that in order to beat forex rate fluctuations, they will need to have some special organisational and psychological skills. Here is a list of things that expert forex traders do.

Emotional Discipline

The most important quality that expert forex traders possess to beat the volatility inherent in forex rates is emotional discipline. The reason why this is important is that without emotional discipline, a trader can end up making some very serious gaffes on the forex market. These mistakes can easily result in the whole account equity of the trader getting blown to bits.

Price Action

Another thing that is common amongst all expert forex traders is that they know how to use price action analysis in the forex market to profit. Price action analysis is, in simplest of terms, the analysis of forex rates and their specific trends.

Price action analysis is considered to be the simplest strategy that any trader can adopt in the market. More importantly, prevalent wisdom states that price action analysis incorporates every instance of cause and effect that is relevant to the forex market.

Reward to Risk Ratio

Reward to risk ratios are mainly the comparison between the risk inherent in the trade and the kind of rewards it can yield. Expert traders make it a point to never invest against the reward to risk ratio that they are targeting in the market. At the very least, expert forex traders do not invest in any trade that offers them a reward to risk ratio of less than 2 to 1.

Drawdowns

Drawdown is something that most expert forex traders also worry about because fluctuations in forex rates can sometimes result in massive losses. They know exactly how much drawdown they can stomach with each trade as well as the total drawdown that their total account equity can handle without becoming severely limited.

Positions Sizes

Expert traders maintain their reward to risk ratios and special order placements in terms of what their analysis of forex rates tells them. Instead, when it comes to managing risks, they simply modify their position sizes to suit not only the specific merits of the trade but also the dollar risk they are willing to take.

Trading Plan

Finally, you should also know that expert traders never attempt to beat forex rates without a well-defined and efficient forex trading plan. This trading plan allows them to follow everything in a structured and stable manner as opposed to vacillating from one thing to another.

 

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