Monday, 30 November 2009

A Novice's Guide to Forex Trading

If you want to start trading in the Forex market and make money, the first step is to learn as much about it as possible. Forex is a place where trading goes on with currencies of different nations, usually via brokers. Foreign currencies undergo constant buying and selling across global markets. The currency movement in this cash market depends a lot on real-world events ultimately affecting traders' investments.

What makes Forex such an attractive proposition is that it is open 5 days a week and 24 hours a day with the dealers always on access. Secondly, as the market is enormously liquid, almost all currencies can be traded. Thirdly, since the market is extremely volatile, the chances of profit are huge. Fourthly, risk can be controlled by using standard instruments here. Fifthly, zero commission trading is possible.

When you trade in Forex, your goal would be to make profit from the movement of foreign currencies. Trading is done in currency pairs. An example will make the basics of trading clear. Suppose that the exchange rate of Euro-USD is 1.5000 on a particular day. This number is also known as "the rate". If a trader buys 1000 euros on that day, he will be paying 1.5000 U.S. dollars for it. A year later the rate becomes 1.9000. This means that the euro value has increased in comparison with the U.S. dollar. If the trader sells his 1000 euros now, he will be receiving 1.9000 U.S. dollars. So he will be making a profit of 0.4000 USD. However, this investment needs to be compared to other alternative investments to know whether it has been really profitable. An example on an alternative investment can be a risk-free investment like U.S. government bonds which are long-term.

One thing that you should keep in mind is that you must buy currencies which are expected to increase in value compared to currencies which you are selling. If a currency you have bought does increase its value, the other currency should be sold back thus locking a profit. "Open trade" is when a trader buys and sells a currency pair but does not traded it further closing the position.

It is a well-known fact that Forex is a very speculative market. At least 70% of the traders have no plans to actually take the profits of the currency traded at the end, they were only speculating.

The reason why most traders fail to make a tidy profit in the Forex market is that they opt for short-term trading. Movement during the day is pretty random and traders who opt for it get stopped constantly and rarely make profits. In Forex you need to think long-term. Again, many traders have a very general idea about volatility. Some traders are so scared of risks that they trade in a way where there is no possibility of winning.

So before you venture into Forex trading learn about volatility, risks, trends and markets very thoroughly. And do not go into it thinking it's a make-rich-quick- scheme. It is definitely not. Forex trading needs concise study and an always-alert mind to really gain from it.


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