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The Resources You Need to Succeed in the Forex Trading Market

Forex is short for “foreign exchange” and has become a fast paced market for trading currencies. Not every country’s money is worth the same, and these values can fluctuate by the minute. Because of this, there is a profit to be made by effectively trading currencies on the forex trading market. However, you’re doomed to become broke if you jump in blindly. Here are some resources to give you the best chance to succeed.

Before you get into forex trading, you need to understand why currencies change in value and what that will mean to you. It makes no sense to trade if you don’t understand why you’re trading. A website called foreximpact.com is loaded with useful articles to give you a head start with your trading. This site covers various trading strategies, interviews from professionals, and the proper way to begin in forex. There are also financial calculators that can calculate the formulas presented in these articles. Look at this site first before you go any further into forex trading.

At this point, even though you have the basics down, you still don’t want to risk your hard earned money. This is where tradingsimulator.net comes into play. Visit the site, download the forex simulator, and practice your craft. It runs on a server that provides real time market conditions, so the results of your work would be real if you had put real money in. As a beginner, you will thank me when you lose your first dollarsignr25,000 in simulated money instead of in real money.

After a while, a good forex trader can notice common characteristics among the many charts. Noticing these commonalities will allow you to accurately guess which direction a currency is heading. Once you get to this point, now you can test yourself out in the real world. Oanda.com is the most popular forex trading site currently, and they provide a lot of helpful information along with their account. Others include forex.com, gftforex.com, and ibfx.com.

Forex trading may not be for everyone, but if you feel it’s right for you, take these steps to ensure that you’re ready before you throw your money into the ring.

What Causes Changes in the Forex Market

There are a ton of different factors that cause a change in a currency’s value. Since the forex market is based on the investor’s confidence in each country’s economy, supply and demand are the ruling forces that can control price. But there are a few different factors that control supply and demand.

Interest rates have a strong affect on the strength of that country’s currency. For instance, if the United States increases its interest rate, it will make the US dollar stronger in the forex market. The US makes it more attractive for investors from Great Britain to invest in the USA because higher interest rates mean more money for the British who put their money into the US market.

As a result, since investors in Great Britain are trying to unload their money on the US, the demand of the Great Britain Pound goes down. Since British investors are trying to obtain American investments, they need dollars to do so. This drive the demand for the dollar up. Because of this, the value of the American dollar increases and the value of the Pound decreases relative to each other.

Another economic factor that effects the forex market is exports and imports. If the United States imports a product from Mexico, they will need to exchange their dollars for pesos to purchase the product. As a result, demand for pesos goes up and demand for dollars go down in Mexico. This causes the dollar to weaken and the peso to strengthen relative to each other.

If the United States exported a product to Germany, the Germans would need to convert their euros to dollars to complete the transaction. When converted, the same thing happens. Euros flood the forex market, causing their demand to drop. Meanwhile, Germany is exchanging them for dollars; causing the dollars demand to rise. This would strengthen the dollar and weaken the euro relative to each other.

Inflation generally causes a country’s currency to weaken in the forex market. Inflation means that the value of the currency is less than it used to be, so it would make sense that its value would also be less in the forex market.

There are many more factors that effect a currency’s forex value, but these are the easiest to distinguish.

Ways to Chart Forex Trends

But just like with any other language, the more you immerse yourself in it, the more it begins to make sense. When using charts, there are a few tools that forex traders use to determine where each currency is trending. These are called moving averages because they average out a certain amount of past days and compare it to the current day. This gives the trader an idea of where the market will head next.

The easiest type is the simple moving average. It’s named this because of how simple it is. There are a lot of different versions of this type of average. You can take the average of as many days as you please, but the standard is 20-25 days.

Take either the opening, closing, high, or low prices for the last 25 days (whichever you prefer), and find the average. The answer will be today’s forex moving average number. The next day, do the same thing starting on the most current day and going 25 days previous. This will give you the new average for that day. The simple moving average will help determine if there is a distinct trend upwards or downwards in a fund.

Another type of moving average is an exponential moving average. Just like the simple moving average, this trend indicator compares the current price against a certain amount of prices in the past period. However, they are calculated very differently.

First, you need to define a period. For the sake of calculations, our period will be 9 days. Take the amount of days in the period and plug it into this formula: 2/(period+1). For our example, the formula would be 2 / 9+1 which would equal 2/10, or 20%. This is how much weight we will put on our prior price.

Find the average of those previous 9 periods and multiply it by 20%. Then, take the current price and multiply that by 80% (we want both percentages to add to 100%). Add those two results to find your exponential average for the day.

Forex traders use these two formulas everyday to find trends in the forex charts. Immerse yourself in the language of forex charts long enough, and you will see the trends appear as well.

Understanding Pips in the Forex Market

Officially, a pip is an acronym for percentage in point. Technically speaking, a pip gauges the change in exchange rate between two different country’s currencies.

All major currencies’ exchange rates (except for the Yen) are compared to four decimal places. This means that, hypothetically, the GBP/USD (Great Britain Pound to US Dollar Exchange Rate) is 1.3287. This means, that for every Great Britain Pound sold, the investor would get 1.3287 US Dollars in return.

Now, suppose that this the GBP/USD exchange rate increased to 1.3294. This means that every pound sold would result in 1.3294 dollars. The investor would receive 0.0007 more dollars than they would have in the previous example.

A pip is a single point change for the 4th decimal point of an exchange rate. For the previous example, if the exchange rate grew by 0.0007, that would translate into 7 pips. If the exchange rate had increased by 0.0182, that would end up being 182 pips.

The reason pips are uses is simple. For the vast majority of forex market trades, the investors are exchanging currencies in multiples of 100,000. Therefore, a change in 1 pip would result in a change of 10 units of currency per 100,000.

If an investor purchased 500,000 pounds when the GBP/USD was 1.2238, and sold them when the GBP/USD rate was 1.2241, they would have made 3 pips, or 150 dollars. Three pips would be 3 times 10 dollars per 100,000 units sold. Multiply that by 5 since the investor sold 500,000 units to get a total gain of 150 dollars.

Pips are the standard gauge for the change in value relative to any two currencies. If one of your relatives of friends say that their investment appreciated 10 pips, now you will finally understand what it is they are saying.

Understanding Exchange Rate Quotes in a Forex Market

For those just beginning their investing in the forex market, it may seem impossible to understand all of the symbols and combinations of letters. Looking at listings for an exchange rate can be baffling. Yet, with the right understanding, reading exchange rates can be second nature.

There are eight major currencies. All of them have abbreviations. The United States dollar is USD, the Great Britain Pound is GBP, the Euro is EUR, The Japanese yen is JPY, the Australian dollar is AUD, the Swiss Franc is CHF, the New Zealand dollar is NZD, and the Canadian dollar is CAD.

All other currencies are considered minor currencies, and have abbreviations of their own. The minor currencies trade much less frequently than the major currencies, so its most important to learn the abbreviations of the major currencies as a beginner. Once an investor becomes more experienced, then they can venture out into the minor currencies.

When an investor sees an exchange rate like GBP/USD 1.2839, it is saying a lot of things. First of all, the two currencies being compared are the Great Britain pound and the US dollar. The base currency is the pound, which means the US dollar is the one being compared to it. The base currency will always have a value of one for the purposes of an exchange rate quote. So, when a quote says GBP/USD 1.2839, it’s saying that, for every 1 Great Britain pound sold, the investor will receive 1.2839. Likewise, if an investor would like to purchase 1 Great Britain pound it will cost him 1.2839 US dollars.

These quotes will always have two different countries compared to each other. Use them to determine if an investment is worth the risk. If an exchange rate number increases, that means the base currency strengthened and became more valuable. If the number decreases, that means the base currency weakened and the other currency strengthened.

Types of Forex Trades

There are a few different types of forex trades: the spot, the forward, the swap, the future, and the option. Understanding these differences and finding your niche will help you succeed in the forex market.

A Spot trade is the simplest form of trading currencies. Basically, a holder of one currency agrees to trade it for a designated amount of another currency. For major currencies such as the various Dollars, Euro, Yen, Pound, and Swiss Franc, this can often be completed within the next business day. For minor currencies (every currency that is not major), this transaction gets completed in two days.

The forward trade is an agreement to perform a spot trade at a certain date. The future date will be agreed upon by both parties, and will be performed on that date regardless of what the market has done since the agreement. If done correctly, this is a way to hedge against risk.

The swap trade is a specialized form of the forward trade. The swap is actually one of the most common versions of the forward trade. Essentially, instead of agreeing to wait until a certain date to exchange currencies in the forex, they exchange immediately. Then, they agree on a future date to re-swap the currency back to normal.

The forex option is the most complicated form of currency exchange. The option is considered a derivative, which means that investors aren’t actually trading currency. They are trading the rights to be able to buy and cell currency.

For example, an investor could purchase an option that gives him the right to sell € 1,000 euros and purchase $2,000 dollars on November 1^st. The exchange rate for this option would be 2.0. If November 1^st comes and € 1,000 is only worth $1,800, the investor would probably choose to exercise the option and buy the $2,000. This way, he can sell the $2,000 at the exchange rate of 1.8 and make a profit of 111 euros.

Of course, investors in the options market usually just trade the rights, rather than actually waiting to exercise them. If someone has an option for an exchange rate of 2.0, and the market seems to be headed towards an exchange rate of 1.5, he would have more incentive to sell the rights and grab immediate gains rather than wait to see what the conditions are actually like when it comes time to exercise the option.

These are the most common types of trades done on the forex market. Research all of them to find your niche, then go out and make some money.

The Most Popular Sites for Forex Trading

When trading on the forex market, nobody wants to worry about the security of their transaction, the likelihood of a dispute, or the closing of the website. The most popular forex trading sites provide easy to use services with a reputation of customer satisfaction. These are the most popular forex sites.

Oanda.com has everything you would expect from the world’s leading forex trading site. The front page has a graphic explaining that 48% of oanda account holders maintain profitable accounts. The next closest only has a 33% profitability percentage. Oanda offers real time exchange rates for the four largest economies, a currency converter for those traveling to other countries, and whats called a heat map. The heat map is a colorful display that shows the strength of other country’s currencies related to the currency you choose. Oanda has a very user friendly interface that allows them to be the leader in their field.

Easy-forex.com is another easy to use forex trading platform. Established in 2001, Easy-Forex was the first site to provide a no-download platform for customers across various languages and countries. They offer a mini-account starting at dollarsignr12.95, and provide an iphone app that allows an investor to track his trades.

Since 1996, iForex has been one of the most popular trading platforms on the internet. They offer not only a web based platform for trading, but a downloadable desktop platform that can perform trades without the assistance of a web browser. In addition to this, iForex offers a funded demo account. The great part of this is that any losses from this account are covered by iForex, but any profits can be kept by the account holder! Their minimum deposit is a little higher at dollarsignr100, but still not unreasonable. However, minimum transactions are for 5,000.

Do some research on these three providers and see which platform works best for you. They all have a great reputation for customer satisfaction and ease of use, so see what they have to offer.

The Differences Between Trading Stocks and Forex

To the novice, it may seem that stocks and currencies are exactly the same. However, there are a few crucial differences that any forex trader needs to understand before embarking on their first currency trade.

Stock prices are based on the demand for just one share of one company; forex exchange rates are based on the comparison of demand for two different country’s currencies. Just because GBP/USD increased from 1.2098 to 1.4928 doesn’t mean that you made money like you would in the stock market. If you were holding on to US dollars, you would have lost money.

The forex market is open perpetually. While the NYSE and NASDAQ are open roughly 9am-5pm (and closed on weekends), the forex market is open 24 hours a day, 7 days a week. That means that anybody can make a trade anytime and anywhere. There is a lot of room for changes in exchange rate in that system, so  be aware. Just because you went to sleep, doesn’t mean the currency you own slept as well.

The forex market isn’t really even a market. While the New York Stock Exchange is a tangible place where stocks are literally traded, forex has no such marketplace. Currencies can be traded with little or no regulation. Nobody is stopping you from giving somebody 20 dollars in exchange for 15 pounds on the street. Likewise, there is no official market to trade currencies. London is where most of the forex trading occurs, therefore, it is generally the default price regulator of forex. However, it is not bound by any regulation.

These differences are very important to understand. Without anticipating a 24/7 marketplace, or the fact that you need to broker deals over the counter, you may get lost. Forex can bring a little bit of shock to those who assume it is just like stocks.

History of the Forex Market

Economically speaking, money is scarce. The more money that is available, the less value it has in society. As a result, some forms of currency can be more valuable than others at a given time. This creates incentive for people to trade and invest in foreign goods and currencies. A forex market developed out of the desire to trade foreign money. Here is the history of forex.

Originally, countries traded under the gold standard. Created in 1879, the gold standard stated that a country could only print as much money as it had gold available. Each dollar was attached to a dollar’s worth of gold reserves.

As a result, countries all had a common basis from which to compare their currency. As a result, if a country traded with another country, and currency was used, gold needed to be included in the trade to give the currency value.

Unfortunately, countries who imported more than they exported would lose all of their gold in trades. Therefore, their currency would slowly become useless. The great depression caused many nations to finally abandon the gold standard of forex.

Once the gold standard dissapeared, leading countries transitioned into an adjustable peg system. Essentially, all other foreign currencies were judged based on the American dollar (and the dollar would be set to gold). There was also the ability to adjust their currency’s value within 10% of its current forex rate. In post WWII, many foreign countries received millions of United States dollars, and there was concern that the US wouldn’t have the proper gold reserves to return payments.

As a result, the world evolved into the present day floating exchange rate. Basically, the forex market is now based on the consumers’ faith in each country’s economy. By trading in the forex based on consumer and investor supply and demand, the competitive market solves a lot of the inequalities that the previous markets faced.

Of course, the internet has turned the forex market into what it is today. Prices continuously fluctuate and can instantaneously reflect changes in a country’s economic confidence.

A Forex Trader’s Daily Routine

No investor does things exactly the same, but profitable forex traders generally have a set way of doing things that help them succeed. Generally, they form a pretty strict routine where everything gets done at a certain time. This can help limit the amount of emotion involved in making trades.

The forex trader will wake up in the morning and read the financial news from the past night to catch up with current events. The forex market runs 24 hours a day, so its possible that things can happen while you sleep. The trader then studies the charts of the currencies he wishes to trade that day. The more an investor immerses himself in charts, the easier it is for him to eventually notice changes in trends. Understanding the behavior of a currency can help him predict where it will go next.

Once the trader understands the charts, he will begin monitoring this currency pair to find the right time to jump in. This usually requires multiple programs since currency exchange rates are constantly changing, and tracking them takes a decent amount of work. Based on the investors technical analysis of the currency’s charts, he will know when the right time is to jump in.

Once he purchases or swaps his currency, he repeats the process to find the right time to get out of the market. Based on technical indicators, there will be a point where the charts will tell him it’s time to exit.

All while this is occurring, the forex trader will need to pay attention to the news. Big events, such as a change in interest rates, or a country announcing its GDP for the year could have a big impact on currency exchange.

The forex trader will work as long as he needs to feel that he got the most out of the market. To be successful, he usually ends at the same time every day to make sure he doesn’t start to chase gains that aren’t there. When the new day begins, he starts the process all over again.