Forex trading For Beginners
It is always advisable to start by opening a demo account. It gives you a trial run before any serious investments. You can learn a lot by observing how things are going on in the market.
The whole thing may check your patience as profits are hard to come by if not persistent in decisions. Never make the mistake of jumping to quick decisions and taking unnecessary risks. The timing of buying and selling of currencies is critical to success.
One must clearly understand when the trend is going up or when the exchange rates are down which can lead to less profit or even losses. Always focus on the current market trends and the global happenings that may affect that.
Intelligent traders never feel overwhelmed by winning trades or getting disappointed by losing a round. The law of averages will catch you sometime. Think straight and plan for the long term scenario. Analyze the conditions prevailing in the Forex market and make intelligent decisions that agree with the market realities. Always remember that to obtain practical profits you must know the trade like the back of your hand.
Why Trade the Forex?
Forex market is the global market for trading currencies. It is the most liquidated financial market in the world. This means that compared to commodities and the stock markets, there will not be much market manipulation.
One can open a Forex trading account with much less money than you must initially invest for a commodity or share trading. There are no brokerage fees in the Forex market. For any pair of currency that you trade in the transaction cost is the difference between their buying and selling price.
The profit or loss may multiply extremely slowly in Forex trading with investments at a leverage of 1:100 and lower. But it can be as high as 1:4 in the commodities and the stock markets. So, you can be sure not to lose your investments and make reasonable profits on the safe side.
Trade execution is almost instantaneous as you don’t have to depend on a broker, to do it for you. Most of the trade is concentrated on a few currencies which make trading simpler, unlike the stock and commodities market where you have them in hundreds and thousands. Making trading decisions even simpler is that except at weekends, the Forex market is open for business throughout the day.
Basic Forex Trading Tips
Good forex trading tips can benefit both new and experienced foreign exchange market (“forex”) investors by providing new ways to manage trades and implement profitable long-term trading strategies. Greed and a failure to properly manage risk are often cited as two of the most common reasons that forex traders lose money. The tips outlined below are provided to help you develop a solid forex trading strategy and stay on track.
What is Forex Trading?
Forex trading is simply the trading of the currencies of different countries against one another to make a profit. The forex market is made up of a network of financial institutions and dealers that serve to connect currency buyers and sellers with market participants consisting of everyone from governments to large corporations and banks down to individual traders.
Forex market participants leverage this network to state their currency needs and conduct market transactions. An example of forex trade would be the buying of U.S. Dollars (USD) with Euros (EUR). In this case, the trader is looking to go long on U.S. Dollar and the transaction would be expressed as USD/EUR.
Some Basic Tips for Successful Forex Trading
The following tips can help new forex investors devise a trading strategy and can assist more seasoned investors in staying on a profitable course:
- Manage your expectations – Most forex traders should not expect too much from the forex market as it is typically not a path to making millions overnight. Successful forex trading can be extremely difficult and challenging and some of the most knowledgeable forex traders see it simply as a means for supplementing other sources of income.
- Try not to trade excessively – Many newer forex traders falsely believe that trading more means working harder and will lead to greater profits. In reality, “less is often more” when it comes to devising a profitable forex strategy and taking on more risk than is necessary can be detrimental to your success.
- Beware of automatic trading tools – Most successful forex traders do not rely solely on automated tools but have instead developed a good understanding of the forex market and can make their own decisions based on any given circumstances. In other words, automated tools can have their place as part of your trading strategy, but good market knowledge is of greater importance
Factors that Determine Currency Exchange Rates
Currency exchange rates do not necessarily represent reflections of the health or productivity of a nation. Instead, exchange rates are determined by supply and demand forces generated by businesses, governments, financial institutions, central banks, and individuals participating in the foreign exchange market. Below, is the list of the factors that have the most significant influence on exchange rate changes.
Changes in Relative International Price Levels: Changes in relative international prices impact a nation’s importing and exporting levels. If for example, Canada’s prices rise faster than prices in the United States, these relatively higher prices in Canada would reduce the demand for Canadian goods and services by U.S. residents, thereby reducing the demand for Canadian dollars. At the same time, higher relative prices in Canada and a stronger Canadian dollar relative to the U.S. dollar might increase their demand for U.S. imports and U.S. dollars.
Changes in Relative International Real Gross Domestic Product (GDP): If Canada’s real GDP rises relative to the U.S., the ability of Canadian residents to purchase U.S. goods and services rises, resulting in an increased demand for U.S. dollars and a relative decrease in the Canadian dollar.
Changes in Relative International Interest Rates/ Investment Returns: Any time a nation lowers its interest rates relative to the interest rates of another nation, the money flows between the two nations are impacted. A relative reduction in Canadian interest rates compared to the U.S., for example, would cause U.S. investors to decrease their demand for Canadian dollars. This decreased demand would cause the relative value of the Canadian dollar to fall.
Changes in Relative International Risks, Taxes, and Expectations: An increase in one of Canada’s taxes or risks relative to those factors in the U.S. will cause a decrease in demand for Canadian dollars by U.S. residents. Any speculation regarding these factors will impact exchange rates.
Changes in Central Bank Intervention: A nation’s central bank will often work to influence the relative value of its currency to the benefit of its economy. As an example, if the U.S. Federal Reserve sees benefit in raising the value of the U.S. dollar relative to the Canadian dollar, it would take action to decrease the relative supply of U.S. dollars.
An Expectancy Calculator to Monitor Forex Trading Strategies
A forex trading system is a strategy implemented to help determine the timing and price levels at which to open and close forex trades. Most trading systems leverage signals that are generated by fundamental or technical analysis. The trader evaluates and acts on these signals to decide whether they should buy or sell a specific currency.
Used properly, a forex trading system will filter for just those signals that offer relevant information to the trader. The trader should evaluate the level of success or failure of its trading system on an ongoing basis and make strategy changes if necessary.
Types of Trading Systems
Generally speaking, there are two types of trading systems:
- Discretionary: Discretionary trading systems rely on the judgment of the trader to properly interpret signals and take appropriate actions. For this reason, the use of discretionary trading systems is typically recommended only for professional forex traders.
- Mechanical: Mechanical trading systems can offer less experienced forex traders an automated way to interpret signals and execute a trading strategy. The development of these mechanical systems requires the creativity of professional traders to monitor a fixed number of fundamental or technical signals and generate triggers to the system user.
Expectancy is a formula used by forex traders to assess the reliability of their trading system. To calculate expectancy, the trader will collect data regarding winning and losing trades to determine how profitable winning trades were versus losses taken on unsuccessful trades.
The formula for expectancy can be written as:
E = [1 + (W/L)] x P-1
W= Average winning trade
L= Average losing trade
P= Percentage win ratio
A positive expectancy of 20%, for example, would mean that your trading system will (over the long-term) return 20 cents for every dollar.
The Value of Knowing the Expectancy
Expectancy offers forex traders a good way to analyze and compare systems and revisions. Any system that brings a negative expectancy ratio should not be used.