When you place a trade in Forex you are basically hoping for the economy of a specific country to gain an advantage in the currency exchange rate versus another country. Because of the high liquidity in the Forex market (see home page for more info) traders can place buy and sell orders that are instantaneously finalized and complete. Since the exchange rates of each country fluctuate every second, this provides traders with opportunities to take quick profits, or losses, in this market.
There are many reasons why so many people choose trading Forex over Stocks. One of the first is that the Stock market runs for 6.5 hours/day, 5 days/week and is closed on holidays. The Forex market is open 24hrs/day throughout the week and is still open during holidays. There are thousands of stocks listed on the NYSE and NASDAQ. Do you have the time to stay up to date with this many companies? With Forex, there are only a few dozen currencies and the majority of traders follow less than 28 currency pairs (learn below). Also, the commissions/fees for a Broker in the stock market can be steep, but in Forex there are no commissions. The Spread (learn below) is how the Brokers make money and that does not cost you anything.
One of the biggest benefits in my mind to trading Forex over Stocks is instant execution of orders. If you go sell a stock today, it takes a few days before everything settles and your money is available. Meanwhile, the Forex traders are entering and exiting trades, locking in profits instantaneously. You are also able to go short (sell) on any Forex currency pair an unlimited amount of times. This is not the same with stocks, as companies only provide a set number of shares available to short sell.
Leverage (learn below) is another HUGE advantage, as this allows Forex traders to enter much larger positions with less money down. Can you imagine if you could buy $50,000 of company stock for $1,000? In Forex, you can... only you are buying currency and not shares in a company. The list goes on and on.
There are thousands of companies available for you to purchase stock shares in. However, in the foreign exchange market there are only a few currencies you need to focus on. Initially, it is best to concentrate on one currency pair while you learn. Eventually, you will be ready to follow the 8 major world currencies. These major currencies are traded together in every variation against each other (i.e. AUDCAD, AUDCHF, AUDNZD, etc.) to make 28 pairs. The major currencies are the most heavily traded due to the fact they are in the world's largest economies. In the Forex market, the US dollar is KING! This is based on the fact that the US is the largest economy in the world and the dollar is the reserve currency of the world.
Exchange rates are a ratio of one currency valued against another currency. The rates for each unique pair fluctuate based on which country's currency is stronger at the moment. When these currency ratios change in your favor, you make money. In Forex, you buy currency in pairs. For example, if you buy the GBP/USD pair, that means you think the Pound will appreciate against the Dollar. If you sell the GBP/USD pair, that means that you believe the Pound will depreciate against the Dollar. In Forex trading, you are simultaneously buying and selling a currency. This is done automatically through your broker when you click buy or sell.
Please see the exchange rate above. This means that €1 (1 Euro) will cost you $1.0719 dollars. This rate only needs to move a few decimals (i.e. $1.0739) for you to profit.
The Bid is the price your broker is willing to buy the base currency in exchange for the quote currency. The Ask is the price your broker is willing to sell the base currency in exchange for the quote currency. The Spread is the difference between the Bid and Ask price.
When you see a currency pair, you will see a price to buy or sell the currency. The amount between those prices is the spread. The only reason this matters is to make sure you place trades during high liquidity times when the spread is low. You will learn more about this eventually so do not be overwhelmed on these terms for now.
The term "PIP" stands for point in percentage. This represents the smallest unit of change in a currency pair. For most major currencies, a pip represents the fourth decimal place in the exchange rate. This decimal place does vary for some currency pairs. For currency pairs that involve the JPY, a PIP is represented by the second decimal place. In the world of Forex, PIPs are everything. PIPs determine how much money you have profited or lost. These will become a large part of your money management system in trading Forex.
You can open an account with most Forex brokers for FREE! I use Forex.com but Oanda and IG are also great Brokers I would recommend. You want to start with a DEMO account! This is a practice account that participates in the real market with fake money. A Demo account allows you to truly learn Forex first hand without losing any money. You can place orders and learn the mechanics of your broker/practice your strategy without risking any capital. You should ALWAYS trade with a Demo account when starting to develop a solid, profitable system before you think about putting real money on the line. Once you are comfortable, you can start with as little as $100 of real money with most Brokers.
Margin trading enables you to open larger position sizes using only a fraction of the capital you would normally need. This is how you can enter into $1,500-$25,000 positions with as little as $30 or $500. The reason this happens is because you buy "Lots" in Forex, meaning you buy in groups of 1,000 units (5,000/12,000/etc.). Your Brokers only requires you to put down a certain percentage (i.e. 2%) known as Margin, to enter into these positions. This provides you with what is known as Leverage. For example, 50:1 Leverage (which means you are required 2% Margin) means $1,000 from you will open a position size of $50,000. This is beneficial because in a position worth $50,000, you only need a small movement to make a great profit.
This is a quick example of what placing a trade looks like.
This is with a Demo account on Forex.com, entering a Sell position with the EUR/USD.
It is crucial to always have a Stop Loss in Forex. This will ensure your order will automatically stop if price goes in the opposite direction against you, limiting how much you can lose per trade. Once you are well into profits, you can move your Stop Loss to break-even so you are now in the trade knowing that no matter what, you will not be losing money. I will dive deeper into this topic in the Advanced Learning section.
In Forex trading, there are two types of market analysis, Technical and Fundamental. Some traders only analyze the Technicals and some trade based only on the Fundamentals. What are the differences of each? Which is best? This is an ongoing argument but the best traders in the world do BOTH!
Technical Analysis traders use price movements and patterns on charts to predict where price will go for each currency pair. Technical traders are typically in shorter term positions (day or swing trading) compared to Fundamental traders. This analysis doesn't involve any news events, just chart information.
Fundamental Analysis traders use economic factors and news events to predict where price will go for each currency pair. These traders are typically in long term positions. This analysis is heavily involved in keeping up with news to assess the economic well-being of each country, and by extension, the currency.
Foxx Forex does both, but mainly trades based on Technical Analysis. Our analysis involves price action and indicators on charts to determine where price will go. We keep up with only high impact economic news events (i.e. Non-farm payroll reports, GDP, Trade Balance, etc.) when they are released for each country.
In the picture above, you see a candlestick chart with a red and green line moving throughout. This line is what is known as an indicator. These are tools that you can place on your charts with built-in calculations to determine which direction price will go. With the correct combination of indicators, technical analysis traders are able to make an accurate prediction of where price will go. Most all professional Forex traders use indicators as a tool to assist in deciding whether to enter a buy or sell position for their trade.
As you begin your trading journey, there are a few questions that you should answer. How much time can you commit to trading each day/week/month? This includes analyzing the charts, backtesting your trading system, keeping up with some news if you are more fundamental, etc. The amount of time you have available should determine what your trading style is.
If you have more time to spend in front of the charts, you might be a day trader (entering and exiting trades throughout the day). If you have a decent amount of time but still need to maintain a full-time job, maybe swing trading (entering/exiting trades every few days) is better for you. Or are you thinking much more long term? These need to be considered before trading because these answers will determine what time-frames you need to analyze your charts with in the near future.
Forex trading should be treated as a profession. Clear plans, systems, goals, and performance review are critical components to your success in this market. Controlling your emotions and being disciplined will take practice but you MUST master your psychological mindset in Forex. When providing new and experienced traders with advice, one of my main tips is to be PATIENT. It is a virtue and especially with Forex trading. Every aspect of Forex requires patience so prepare yourself now before you really dive in.
Out of everything, MONEY MANAGEMENT can determine if you win or lose, period. This is an area I will cover more in the advanced learning section. You should NEVER trade Forex with money you cannot afford to lose. When the time comes to trade real money, determine how much money you are comfortable trading with. This will help you keep your emotions in check.
Trading foreign exchange on margin involves high risk and may not be suitable for all investors. High leverage can work for you as well as against you. Before deciding to trade the foreign exchange market you should take special consideration of your objectives, experience, and risk appetite. As with all investing, there is a possibility that you could sustain a loss of some or all of your investments. Therefore, you should not trade with money that you cannot afford to lose. You should be aware of these risks and seek advice from an independent financial advisor if you have any doubts. All analyses, opinions, news, research, or other information contained within any of Foxx Forex media, is provided as general commentary and does not constitute investment advice. Foxx Forex, or any of its constituents, will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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