What is Forex? -Forex Trading Tutorial

 

What is Forex?

Forex means Foreign Exchange and it is a global market where a country’s currency can be exchanged for another country’s currency. Many different participants are executing transactions in the Forex Market, participants like commercial and central banks, importers and exporters, investment companies, large institutional investors and many retail (individual) traders. Payments for imports and exports are forming the Consumer Forex Sector. Other Forex Market Sectors include the Currency Investment Sector and the Retail Forex Sector.

 

The Golden Combination of High Liquidity and Capital Leverage

Today the Forex Market is the larger financial market in the world with estimated daily turnovers worth more than 4.5 trillion USD (in a single day). This enormous liquidity minimizes the distance between buyers and sellers (bid and ask). This distance is also called as the Spread. Spread is measured in pips and one pip equals 0.0001. On average, high-liquid currencies (for example EURUSD) can be traded with as low as 1-2 pips spread. That is extremely important as concerns the second great advantage of Forex Trading called the trading leverage. Capital leverage when trading Forex can reach 500:1 and that means theoretically trading 500,000USD with just 1,000USD. Now if we combine the ability to leverage trading by x500 times (or more) with the ability to open and close positions in tiny spreads (buy and sell) then we can understand why Forex Trading is so popular among world traders.

 

Forex Market 24/5 Operation

The Foreign Exchange Market is open 24 hours a day five days per week. It starts 21.00 GMT on Sundays and ends 21.00 GMT on Fridays. There are many Forex Centers around the world the most important centers are found in London, New York, Tokyo, Hong Kong, Sydney and Canada. The Forex Trading Hours are divided into three main Sessions (US Session, European Session and Asian Session).

 

What are the Advantages of Trading Forex?

The Forex Trading offers some unique advantages to world traders:

(1) Huge liquidity which is transformed into tight spreads

(2) Forex is a very competitive market, and this competition among brokers and dealers leads to minimal transactional cost on behalf of institutional and retail traders (spreads and trading commissions charged)

(3) Ability to leverage your capital up to 500 times (500:1 leverage) or even more

(4) Trading on both sides (bullish or bearish Forex markets)

(5) Great diversity of Currency assets available, you may trade more than 120 Forex pairs nowadays

(6) Non-Stop Trading, 24-hours per day, 5 days per week

(7) Trade from anywhere using a Laptop, a common Tablet or even your Mobile Phone

(8) Manual and Automated Trading capabilities are available

(9) Existence of hundreds of providers in every aspect of Forex Trading (news, services, software, education)

(10) The Forex Market enjoys theoretically perfect information

 

The Short History of the Foreign Exchange Market

The foreign exchange market or Forex started in 1973. During this year, the Bretton Woods Agreement ended and world currencies begun to trade against the US Dollar. In the previous years the Bretton Woods agreement has failed to support the stability of the global economy due to oil crisis. Additionally to the introduction of the free floating currency system, the IMF (International Monetary Fund) was established as a stabilizing factor. In this context the US Dollar grew stronger and stronger and Europe decided in 1978 to create the European Monetary System. The Online Forex Market begun in late 90s when retail Forex Brokers started to break large interbank liquidity into smaller units and offer them to retail traders. Later in 1999, the European Currency (Euro) was created as the official currency of the Eurozone. Since then, Online Forex Trading has boomed in an international level.

 

Simple Trading Tips when Trading Forex

Trading Forex is the easiest way to understand who you really are. All of the advantages and disadvantages of your personality will be quickly uncovered, even by day one. Therefore, the most important issue when trading Forex is to discipline yourself in things that you must do and things that you must avoid. Here are some basic rules:

1) Implement a Trading Strategy that suits your personality –No matter how good trader you will prove if you don’t implement a trading strategy and some money management techniques you will lose in the long-run. A Trading Strategy and the corresponding Money Management System should focus first on risk minimization

2) Place Always a Stop-Loss –Not placing a stop-loss when trading Forex is like going to a prehistoric war without holding any shield.

3) Use Leverage Wisely –Never forget that Trading Leverage is a friend and an enemy at the same time. Using high leverage you just not increase your profit potential, you increase also your trading risk and furthermore you increase your trading cost. High trading leverage should be used only when the spread charged is minimal (less than 2 pips).

4) Don’t get Emotional with your Trades –Get emotional with your friends and family, never with your trades

5) Follow the Trend and Run Your Profits –Recognizing a chart pattern and following the trend is very important. Once you find a master trend, follow it and run your profits by placing a wide stop-loss.

6) Choose your partners wisely –Choosing the right Forex partners (brokers, signal providers etc) is a factor distinguishing winners from losers in a high extend.

7) Don’t Trade Intraday Instead be a Swing Trader –Anyone familiar with Forex Trading statistics know what I am talking about. Most intraday traders lose instead Swing Traders (time horizon 1-5 days) can really prove successful traders in the long-run.

 

Can Forex Trading Prove Successful?

Yes, Forex Trading can prove successful in the long-run based on the existence of talent and discipline upon some important trading rules. First of all you must understand that you are participating in an extremely competitive trading environment, where your rivals enjoy advantages that you probably don’t. For example institutional traders enjoy better information than you, better technology than you and most importantly, lower transactional cost than you. So it is obvious that if you try to trade intraday against them you will lose. The shorter the time frame used, the greatest the disadvantage for retail traders. Follow my words and don’t try to evolve as an intraday trader. Why every broker tries to make you an intraday trader? It is simple. Intraday traders execute hundreds of trades and huge daily volumes and that frequent trading activity generates good money for brokers but unfortunately not for traders (in the long-run). The solution is to go after mid-trends and evolve as a Swing Trader. Swing traders have a time horizon of 1-5 days so they completely avoid the annoying market noise of intraday price fluctuations. Nobody can predict market noise. Swing Trading may also enjoy huge profits as any other trader.

 

Forming the Profile of the Successful Forex Trader

Here is the profile of a Forex Trader who can really prove successful in the long-run:

(1) He knows himself and knows also that he can’t get rich in a matter of weeks

(2) He follows a clear Trading System according to his risk profile and endorses basic Money Management techniques. He applies an entry-strategy and an exit-strategy for every trade.

(3) He dislikes the market noise of Intraday Trading and clearly avoids it

(4) He prefers to trade within a minimum time horizon of 1-5 days (Swing Trader) or he places Long-Trades

(5) He uses leverage wisely (5:1 up to 50:1) and leaves a lot of space for his stop-loss orders

(6) He respects and follows the master-trend. He also accepts trades only if the ratio of Winning Pips / Losing Pips Ratio is more than 2.

(7) He doesn’t open positions worth more than 5% of his total available funds (1-2% in the case of large Forex investors).

(8) He selects brokers only among high regulated companies providing also segregated client bank accounts.

(9) He Trades in an ECN Broker that offers him narrow spreads and a great variety of currency assets to choose.

(10) He ignores Forex Bonus and instead prefers a Forex Rebate that minimizes his trading cost furthermore.

 

■ Giorgos Protonotarios, Financial Analyst

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