Make Money with Currency Trading

Posted in Labels:

This article explain the meaning of the Forex market and how it works and ways to profit from this large market

For those unfamiliar with the term, FOREX (FOReign EXchange market), refers to an international exchange market where currencies are bought and sold. The Foreign Exchange Market that we see today began in the 1970's, when free exchange rates and floating currencies were introduced. In such an environment only participants in the market determine the price of one currency against another, based upon supply and demand for that currency.

FOREX is a somewhat unique market for a number of reasons. Firstly, it is one of the few markets in which it can be said with very few qualifications that it is free of external controls and that it cannot be manipulated. It is also the largest liquid financial market, with trade reaching between 1 and 1.5 trillion US dollars a day. With this much money moving this fast, it is clear why a single investor would find it near impossible to significantly affect the price of a major currency. Furthermore, the liquidity of the market means that unlike some rarely traded stock, traders are able to open and close positions within a few seconds as there are always willing buyers and sellers.

Another somewhat unique characteristic of the FOREX money market is the variance of its participants. Investors find a number of reasons for entering the market, some as longer term hedge investors, while others utilize massive credit lines to seek large short term gains. Interestingly, unlike blue-chip stocks, which are usually most attractive only to the long term investor, the combination of rather constant but small daily fluctuations in currency prices, create an environment which attracts investors with a broad range of strategies.

How FOREX Works
Transactions in foreign currencies are not centralized on an exchange, unlike say the NYSE, and thus take place all over the world via telecommunications. Trade is open 24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday to 10:00 pm GMT on Friday). In almost every time zone around the world, there are dealers who will quote all major currencies. After deciding what currency the investor would like to purchase, he or she does so via one of these dealers (some of which can be found online). It is quite common practice for investors to speculate on currency prices by getting a credit line (which are available to those with capital as small as $500), and vastly increase their potential gains and losses. This is called marginal trading.

Marginal Trading

Marginal trading is simply the term used for trading with borrowed capital. It is appealing because of the fact that in FOREX investments can be made without a real money supply. This allows investors to invest much more money with fewer money transfer costs, and open bigger positions with a much smaller amount of actual capital. Thus, one can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. Marginal trading in an exchange market is quantified in lots. The term "lot" refers to approximately $100,000, an amount which can be obtained by putting up as little as 0.5% or $500.

EXAMPLE: You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the price of 1.49889 and wait for the exchange rate to climb. At some point in the future, your predictions come true and you decide to sell. You close the position at 1.5050 and earn 61 pips or about $405. Thus, on an initial capital investment of $1,000, you have made over 40% in profits. (Just as an example of how exchange rates change in the course of a day, an average daily change of the Euro (in Dollars) is about 70 to 100 pips.)

When you decide to close a position, the deposit sum that you originally made is returned to you and a calculation of your profits or losses is done. This profit or loss is then credited to your account.

Investment Strategies: Technical Analysis and Fundamental Analysis

The two fundamental strategies in investing in FOREX are Technical Analysis or Fundamental Analysis. Most small and medium sized investors in financial markets use Technical Analysis. This technique stems from the assumption that all information about the market and a particular currency's future fluctuations is found in the price chain. That is to say, that all factors which have an effect on the price have already been considered by the market and are thus reflected in the price. Essentially then, what this type of investor does is base his/her investments upon three fundamental suppositions. These are: that the movement of the market considers all factors, that the movement of prices is purposeful and directly tied to these events, and that history repeats itself. Someone utilizing technical analysis looks at the highest and lowest prices of a currency, the prices of opening and closing, and the volume of transactions. This investor does not try to outsmart the market, or even predict major long term trends, but simply looks at what has happened to that currency in the recent past, and predicts that the small fluctuations will generally continue just as they have before.

A Fundamental Analysis is one which analyzes the current situations in the country of the currency, including such things as its economy, its political situation, and other related rumors. By the numbers, a country's economy depends on a number of quantifiable measurements such as its Central Bank's interest rate, the national unemployment level, tax policy and the rate of inflation. An investor can also anticipate that less quantifiable occurrences, such as political unrest or transition will also have an effect on the market. Before basing all predictions on the factors alone, however, it is important to remember that investors must also keep in mind the expectations and anticipations of market participants. For just as in any stock market, the value of a currency is also based in large part on perceptions of and anticipations about that currency, not solely on its reality.

Make Money with Currency Trading on FOREX

FOREX investing is one of the most potentially rewarding types of investments
available. While certainly the risk is great, the ability to conduct marginal trading on FOREX means that potential profits are enormous relative to initial capital investments. Another benefit of FOREX is that its size prevents almost all attempts by others to influence the market for their own gain. So that when investing in foreign currency markets one can feel quite confident that the investment he or she is making has the same opportunity for profit as other investors throughout the world. While investing in FOREX short term requires a certain degree of diligence, investors who utilize a technical analysis can feel relatively confident that their own ability to read the daily fluctuations of the currency market are sufficiently adequate to give them the knowledge necessary to make informed investments.

What is the FOREX market and why trade it?

The Foreign Currency Exchange, often referred to as the FOREX or FX, is the world’s largest financial market - more than 20 times the size of all the other equities markets combined - with approximately $3.2 trillion dollars traded daily. “Traded” simply means exchanged (bought and sold) via electronic software that connects FOREX traders and banks via a FOREX broker. The “broker” is the middle-man between the traders and the banks; the banks make the market so are referred to as “market makers”.

The FOREX market is essentially central banks of major countries and their lesser banks connected electronically. The “goods” being traded are currencies of various countries, with the majority of the action involving the so-called major currencies: the United States dollar (USD), the European euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), the Swiss franc (CHF) the Consolidated Helvetica franc, the Australian dollar (AUD) and the Canadian dollar (CAD).

The FOREX market has existed for 30+ years; it is the first truly fully electronic market in the world, very transparent, thus has less slippage, near zero manipulation and much less competition than the NYSE (New York Stock Exchange) or other equities markets.

You can trade the FOREX market from any place in the world where you have an Internet connection, 24 hours a day, 5 days a week, Sunday through Friday. You only have to choose between 7 of the major currencies in the world (above) vs. more than 40,000 stocks in the NYSE. These 7 currencies account for 85% of the three trillion plus dollars traded in the FOREX market daily.

FOREX brokerage houses allow you to open an account with $500. Not so in the NYSE and other markets; usually, $10,000 is required to open an account in the equities markets. There are comparatively less transaction fees in the FOREX market than in other markets.

FOREX provides higher leverage of your money than any other financial market (e.g. 200:1 vs. 1:1 in the NYSE or 10:1 in the Futures market). Leverage is a double-edged sword; it can dramatically amplify your profits as well as your losses, however with much friendlier margin calls in FOREX, than the NYSE, FX has become attractive. Many traders view the FOREX as recession proof because it has nearly four trillion dollars a day moving around the world through the banking network; they do not consider the FOREX will crash, disappear nor “have a bad year”.about
In 1997 there was about 150,000 DAY traders in the world trading on the NYSE. Today there are 45 million traders trading the NYSE, Options and other equities markets, but only about 500,000 FOREX traders in the whole world. The majority of these are banks, hedge funds and corporations; less than 200,000 private individuals trade the FOREX. The chance that it will take 12 years for the FOREX market to have as many traders as the equities markets is unlikely because currency is more liquid, brokers offer greater leverage and the market is so large it is less manipulated. It is the most rapidly growing market in the world today.

Much interest is being generated in the FOREX these days, thus traffic regarding this topic is expanding rapidly on Internet sites. In 2005 one would have hardly seen a mention in Futures Magazine regarding the FOREX market; today a significant portion of the magazine is dedicated to this market.

Lastly, one is less likely to be the adverse effect of something that one fully understands and can apply correctly, so the key, and really why one would want to trade the FOREX is, because he has been well educated and trained in this market before rushing into ‘live” trading.  A thorough and gradient approach to the material, utilizing lots of application, prior to risking one’s money is the best reason why one would want to trade this market, or any other market.

Article Sources: