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Forex Trading Basics

Forex Trading Basics

Table of Contents

Forex trading may be as rudimentary as when two individuals exchange dollars for euros on the street enabling a tourist to call from a phone booth in Hungary, for example. The more sophisticated Forex trading experience is in the interbank market. The interbank market is not a single location; like the Internet it is accessible from millions of locations. Forex trading in the interbank market lies in the complex network of the world’s banks.

From the beginning, Forex trading has been done in two forms — over-the-counter cash trading, and currency futures and options trading in a currency exchange. The Forex trading broker operates in both markets; you as an individual investor probably are familiar only with cash trading.

Forex trading, whether over-the-counter or futures, is very exciting. The amount of leverage allowed you is what enlivens Forex trading. Trading in futures can have a leverage ratio of 10 to 1, or more. But over-the-counter Forex trading can have leverage ratios as high as 100 to 1. Admittedly, leverage is a double-edged sword, but this huge leverage can make minor price fluctuations in Forex trading seem tremendous to the bottom line — in profits and, more importantly, losses.

When companies promote Forex trading, they typically put emphasis only on the over-the-counter cash market. This is limiting. Since Forex trading exists in two forms simultaneously, the over-the-counter cash market and the futures market, small speculators actually have access to a lot of the same Forex trading capabilities as large banking institutions. This capability is something unique, not to be found in other investment opportunities.

The capability for simultaneous Forex trading in the two markets places you on a level with hedgers. Large speculators and investment funds trade both sides of Forex with great ease. They know there is no easy way to predict the direction of the over-the-counter Forex market, but once a direction has been set you can rely on the market movement. They are also aware that all Forex trading is a zero-sum game: if you win, someone else loses money.

Having such considerations in mind, the big players long ago realised that Forex trading requires discipline, and that disciplined Forex trading requires them to explore all of their options. This is the only route to success. Being a small speculator, you will have to be equally disciplined, if not more so. The keys to that discipline would be:

First, prepare for the losing trades. There are many small speculators who put all of their limited risk capital in one trade. Several more will add to losing trades. Some of these will actually try to fight against the market. You must try to avoid traps like these.

Second, prepare for the winning trades. In Forex or FX trading, you should not be afraid — and should not forget — to lock in the profits from a winning trade with a futures or options Forex contract. You will want to avoid getting caught in a currency reversal and having to give back profits.

Lastly, have faith in yourself and your decision-making process. Don’t wait for your sure-fire trade to prove itself and in the process miss out on all the profits by picking the top of a market. 

Remember that every preventable mistake in Forex trading finds its roots in two emotions, fear and greed. Small speculators consistently react with either one of these emotions, thus setting themselves up for failure by leaving no room for discipline.

Forex Trading

what is forex trading

Online Forex Trading may sound complicated, and in some ways online trading can be, but what it boils down to is an exchange of one currency for another.  Online forex trading uses changes in the value of currencies over time to try and achieve a profit when sold. 

A quick explanation of day trading in the currency markets is that day trading refers to the buying and selling of currencies within the same trading day.  Day trading means that all positions are usually closed by the end of the trading day whether you make a profit or a loss through your day trading activities. 

Some day trading buys and sells last just a few minutes and some day trading activity may last for hours, but the number of trades allowed during every working day are unlimited in day trading.  Those investors who partake in day trading often use systems or strategies which they or others have developed to try and predict the market shifts and make maximum day trading profit.  However, day trading often deals with incredibly short “trends”, some day trading market trends lasting moments and some much longer, so day trading market shifts can be notoriously changeable and often unpredictable.

Online Forex Trading

Online forex trading differs from conventional day trading because it is possible for online trading to happen twenty-four hours a day.  Thus online trading with a forex system is very much more convenient than day trading, as the time of day in different countries isn’t as vital to the way that online forex trading functions. 

With the internet meaning that the other side of the world is merely a mouse click away, day trading has been overtaken in many quarters by online trading.

Another way in which online forex trading differs from conventional forms of day trading is the small amount of capital needed for investors to start online forex trading.  Day trading can deal with huge amounts of money in lump sums, whereas the instant nature of online forex trading means that smaller amounts can be easily moved around with online trading. 

The ever-changing and shifting world of currency means that online forex trading can be risky and everything can change in an instant, whether you have a forex system in place or predict the markets yourself. 

To counteract the risks are of course the benefits of online forex trading, with steady and consistent wins bringing considerable online trading profit given time.  With the 24-7 internet culture growing all of the time, day trading is no longer the king, as the benefits of online trading outweigh traditional day trading for many investors.

Online Trading

With a market so variable, it can make a huge difference to your online forex trading fortunes if you employ a forex system to help predict changes in the online trading markets.  These “trends” can be interpreted by forex systems and they can help those who partake in online forex trading to know when to enter and when to leave a certain market. 

The way that forex systems do this is by applying the logic of previous prices in the world of online trading and to use formulas to work out when the next online trading trend will begin or end.  The reasons that online trading trends occur in the first place can be many, but the forex system can apply the rules of its logic to give a best estimate of the right time to enter or leave an online trading market.

The sign of a good forex system is for it to have a proven rate of return over time, although some losses are inevitable.  A good forex system will keep these losses to a minimum because although there will always be online trading market movement which cannot be predicted, the majority of online forex trading follows the rules of logic that your forex system applies.

Day Trading

There are many forex systems which promise you incredible returns if you register for a sizable monthly subscription.  However be wary of a forex system which looks too good to be true and offers online forex trading guaranteed returns of 100%+ a month. 

Although some very good forex systems do exist and new and refined forex systems are constantly being developed, there is no gain without risk and a good forex system provider will take that into account and not offer unachievable guarantees when you start online forex trading with their forex system.

Although many people see online forex trading, day trading and any form of online trading as gambling, the mentality of a successful online forex trading investor is one of discipline and businesslike rather than impulsive. Successful online forex trading investors will have spent a great deal of time researching the online trading markets that they enter before they start with online forex trading in that area. 

Mastering the basic structure of day trading, online trading or any other kind of trading is not an overnight process and there are many day trading or online forex strategies which must be learnt in order to have the best chance of online trading success.

Forex Strategies

Because of the liquidity of the online forex trading markets, a Forex Strategies may or may not be the most useful option for you.  If you are trying to enter many different online trading markets then you may well find that you will need a new Forex Strategies for each one, meaning that you have to devise a large number of forex systems which will be very time consuming. 

Focusing your energies on creating many Strategies and concentrating on a wide selection of markets may mean that you spread your knowledge too thin, and it would be a better use of time to research a couple of different online trading markets rather than trying to learn all of them well enough to devise Forex Strategies to suit.

Online trading can be a very rewarding and lucrative business if you take the time to do your research properly into those online trading markets you wish to enter.

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