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How To Trade Forex
from:Interested in knowing how to trade forex? We are not surprised! Forex or foreign exchange trading can be a very lucrative form of investment. It is attracting increasing numbers of investors but with a daily turnover of almost $4 trillion, this is a huge global market that can accommodate plenty more.
Let's be clear from the get go: this is a risky business. Forex trading, like stock trading, is speculative. The prices change fast and you can be caught out. Your returns will not be steady or predictable. In fact, all traders expect to make losses from time to time. The aim is simply to make sure that the profitable trades outweigh any losses.
So what does it involve? Well, forex trading is another name for currency trading. As you probably know, the value of any currency tends to rise and fall depending on how well its country is performing economically. You have almost certainly heard news reports of the dollar strengthening or weakening compared with other currencies. In currency trading you simply exchange one currency for another depending on whether you think a currency price is rising or falling.
To take a very simple example, imagine that the euro was strengthening so you decided to buy euros. You might exchange $100 for 70 euros. Then you would wait for the rate to change. If it rose as you expected, you would change them back and you might get $102 for your 70 euros after broker costs. That is a profit of $2 or 2% of your investment - not bad when you multiply it up.
Leverage or trading on margins is what allows you to multiply up. Brokers know that a currency rate is never likely to change beyond certain boundaries in a very short time, so they are prepared to let you control a large trade with just a small investment fund. Leverage typically gives you a position size of 100 times your investment.
This means that in the above example, if you committed $100 to the trade through your broker, you would be controlling $10,000 on the market. So instead of having a profit of $2, you would make $200. That's a pretty good return on a $100 investment!
Of course this also means that you could lose big time too, so you use stops to minimize your risk. A stop is an order to close your trade if the price goes against you. In this example you might set a stop at 10 pips below the opening price which would be triggered if the price fell. This would limit your loss to $10.
EUR/USD (the euro against the US dollar) has the highest volume of trades of all of the possible currency pairs so it is a good one for beginners to start with. However, you can trade any of the major forex currencies. You are not limited to the currency of your own country. If EUR or USD was going through a very unstable time you might prefer to switch to another pair.
Currency trading goes on all over the world. It operates in so many different time zones that trading is possible 24 hours a day during the business week. This can be a big advantage for home investors who have a regular job. Unlike the stock market, you can trade forex any time of the day or night.
Forex trading can be done from your home computer. You will need a broadband connection to hook up with your broker's software which allows you to trade on live prices. Most brokers offer a demo account so that you can get to know their software and practice your trading skills. You will want to follow a forex trading system that will set certain parameters or trigger signals for your trades. You can test out the system in a demo account until you are completely comfortable before switching over to real money.
Alternatively, you can use a forex robot for your trading. This will be set up to trade automatically for you from your computer. It follows its own system according to the settings that you select. This is still not risk free but it makes trading much easier and also allows you to take advantage of the full 24 hour trading day. Instead of taking months developing your trading skills, you just need to put in the time to setting up the robot, which you can probably do in a few hours. Then you do not even need to learn how to trade forex yourself but just let the robot do it.
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