Currency Trading Basics

CURRENCY TRADING BASICS
All currency trades involve the buying of one currency and the selling of another, simultaneously. Currency quotes are given as exchange rates; that is, the value of one currency relative to another. The relative supply and demand of both currencies will determine the value of the exchange rate.
When a currency trader places a trade he wants the currency purchased to appreciate in value versus the currency sold. His ability to determine the direction that the exchange rate will move, will dictate his gain or loss in a trade. Let's do an example with a currency quote obtained from the forex trading system.
Example of a forex trade
The current bid-ask price for EUR/USD is 1.0120/1.0126, meaning you can buy 1 euro (EUR) for 1.0126 US dollars (USD). Suppose you feel that the EUR is undervalued against the dollar. To execute this strategy, you would buy Euros (simultaneously selling Dollars) and then wait for the exchange rate to rise.
So you make the trade: purchasing 100,000 EUR (1 lot) and selling 101,260 Dollars. (Remember, at 1% margin, your initial margin deposit would be 1,000 Euros.)
As you expected, EUR/USD rises to 1.0236/42. Since you bought Euros and sold Dollars in your previous trade, you must now sell Euros for Dollars to realize any profit. You can now sell 1 EUR for 1.0236 Dollars. When you sell the 100,000 Euros at the current EUR/USD rate of 1.0236, you will receive 102,360 USD.
Since you originally sold (paid) 101,260 USD, your profit is US $1100.
Total profit = US $1100.00
FOREX QUOTE - HOW TO READ A CURRENCY QUOTE
Before trading currencies an investor has to understand the basic terminology of the forex market, including how to interpret forex quotes. In every foreign exchange transaction an investor is simultaneously buying one currency and selling another. These two currencies make up a currency pair. This is an example of a foreign currency exchange rate of the dollar versus the yen:
USD/JPY = 119.72
The currency to the left of the slash ("/") is called the base currency (in this example, the US dollar) and the one on the right is called the quote currency or counter currency (in this example, the Japanese Yen). This notation means that 1 unit of the base currency (that is, 1 dollar) is equal to 119.72 Japanese Yen. If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency; in the above example, you have to pay 119.72 yen to buy 1 US dollar. If selling, the foreign currency exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency; in the above example, you will receive 119.72 Japanese Yen when you sell 1 US dollar.
As with stocks, a forex quote includes a bid price (or bid) and an ask price (or ask). This can be easily illustrated with an example of a currency quote taken from the forex trading software:
In the above example, the bid price is 119.68 yen and the ask price is 119.75 yen [notice that when the ask price is displayed, only the last two decimal places are displayed to the right of the slash (75 instead of 119.75)]. The bid price is the price at which dealers are willing to buy the base currency (in units of the quote currency) and users of our software can sell. Thus, if a trader presses the button "Sell USD," he/she would sell dollars at 119.68 yen. The ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our system could buy it. By clicking "Buy USD," an investor would be buying dollars at 119.75 yen.
Even though there are many currencies all over the world, 85% of all daily transactions involve trading a group of currencies known as the "Majors." These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The four most actively traded currency pairs are the US Dollar / Japanese Yen (USD/JPY), Euro / US Dollar (EUR/USD), British Pound / US Dollar (GBP/USD), and the US Dollar / Swiss Franc (USD/CHF). The US Dollar / Canadian Dollar (USD/CAD) and the Australian Dollar / US Dollar (AUD/USD) are also actively traded pairs. For traders, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies; i.e., the "Majors."
The examples below were taken from the currency dealing system which provides forex real time quotes. From left to right are the euro-dollar exchange rate, the british pound-dollar exchange rate, and the dollar-swiss franc exchange rate. All of these currency quotes are of major currency pairs.
Taking the example of the euro forex quote (first pair above), buying one euro would cost 1.0099 US dollars and selling would provide 1.0093 US dollars.

Tips And Fact About Scalping In Forex

The only way to make small account big in a short period of time is through the use of really high leverage. But wait... do not jump of the cliff right away. Start with reasonable leverage for scalping, for example 20:1 or at most 50:1, then move on as you see scalping skills improve. But even before that do not be lazy to demo trade your scalping system – make sure it will not disappoint you later...

The only way to trade with high leverage without risking blowing up an entire account in only 10-15 trades is by trading with a tight stop loss. Trading without stop loss will “kill” your investment in no time.

It is wise to decide on the size of the trading lot and exposed risk in advance.Do a simple math: calculate the worst possible situation, e.g. 10 consecutive losses in a row; then see if your account will survive and if there be something left to move on. And, although 10 losses in a row is a very unlikely scenario, you cannot deny it...

Although Forex is active 24/7, not every hour is suitable for scalping.No scalper wants to sit in front of the monitor for numerous hours bored and disappointed with the “sleeping” price as it literally moves nowhere.Scalpers hunt for volatile, liquid market. There are 4 major market sessions: London, New York, Sydney and Tokyo session. To trade effectively scalper needs to learn behavior of a chosen currency pair and define most active sessions, even particular hours for this pair to be able to catch good price moves.

Another thing to keep in mind is spread which brokers charge for different currencies.The higher the spread the harder it will be to collect desired pips(because once trading position is opened, trader must cover spread cost – earn pips for broker first – and only then collect own pips).And, of course, the lower the spread the easier/faster it is to accumulate pips.

Another factor to consider is an average daily range of the price for chosen currency.The wider it is the more realistic is an opportunity to profit from price moves.One of the scalpers’ favorite currency pair is EUR/USD with its low spread and good daily price range.

While using high leverage combined with high frequency trading, scalpers should be very cautious about the cost of actual trading, as each pip here makes a dramatic difference after a large number of trades.This means being very careful with entries and exits, stops and limit orders, and also be very realistic about profit targets.

Once in the trade, scalpers should manage trading risks by:

1) moving stops to break-even as soon as situation permits;

2) taking profits at a logical levels: at round market price numbers: 00, 10, 20, 50 etc., at previous support/resistance levels, at Fibonacci levels etc.

3) getting out of the trade if the price freezes for longer time than expected.

Scalp-trading is very demanding and requires a lot of concentration, constant monitoring of the price and very quick decision making. Also, short time frames used in scalping strategies, require a good grasp of trading complemented with sound technical analysis skills. It is not a place where beginners feel very comfortable as it demands from traders a good chunk of experience.

Scalping involves substantial risk:
A lot of beginners have common problem when trading highly leveraged accounts – they tend to maximize profits by trading with full capital at once. Do not do that! Maximizing chances for higher profits goes hand in hand with maximizing risks! The size of positions opened must be calculated very accurately so that your entire account will not be wiped out with just one(!) very unfortunate trade.Another factor that increases risks for scalpers is the spread traders pay when open a trade.Each time a new trade is open, the spread cost is paid to the broker, thus opening 10 small trades instead of 1 long term trade increases the cost of trading in 10 times.If to measure risk/reward ratio of such scalping activity it may show very risky and potentially losing trading.

Example:

With GBP/USD currency pair a scalper sets profit target of 10 pips and stop loss of 10 pips. So far it is 1:1 risk/reward ratio.In the next step, when the spread is added, the picture changes. For example, the spread his broker charges for GBP/USD is 4 pips.When scalper opens a position he is -4 pips (the spread has been charged). Now in order for him to reach the target of 10 pips profit, the price has to move +4 and +10 pips = 14 pips.On the other hand, in order to trigger his stop loss the price should move... -4 is already in place... so, only -6 pips and he will be stopped at total of -10 pips... the risk-reward ratio has changed in over 2:1, not very promising situation indeed...To understand the full challenge of scalping as a trading style, consider this: hard work and small gains accumulated over a decent period of time could easily be wiped out with one large loss. Finding a balance between profit levels and size of acceptable losses presents the most difficult challenge to scalper’s strategy.

How To Profit Trading Forex

Basic yet important things every trader should know.
If you hear from anyone that making money in Forex is easy, do not believe it. It is a myth. The truth is – being profitable in Forex requires a lot of work, dedication, practice, more than a good discipline, sharp knowledge of money management and understanding of the psychology of the currency market. Not so little and therefore not so easy...

Trading Forex was never about gambling
Trading is not a gambling by guessing where the price will move, although there are many traders (mostly beginners) that are exactly gambling... Trading currencies on the Forex market requires logical and analytical calculations based either on fundamental or technical analysis of price moves.

Making money in Forex requires a set of rules
Making money starts with a plan to make money. Such plan is of enormous importance when it comes to trading foreign currencies. But, besides creating a plan, a trader needs constantly follow it. How often trader brake his rules will affect how much money he will make trading Forex. Sounds simple: create and follow... However, there is a real challenge when trader follows the rules but rules fail to make money... it happens inevitably for every trading system known. If system had proven to be successful, sticking to the trading plan and firmly following the rules even when losing money will eventually yield profitable outcome. Having strong trading discipline and taking losses when necessary is a sign of serious trading approach.

Succeeding in Forex by using money management
To profit in Forex sticking to a set of rules is not enough. Good money management is also needed. Knowledge of how much to trade per each open position and where and when to stop – is what separates successful trader from bankrupt trader. Many beginner traders over-leverage themselves being attracted by big and promising leverages offered by Forex brokers. The truth is that a big leverage is not only about a big win, but also when it comes to be so – a big loss. Leverage higher than 1:20 will not attract serious investors.

Know your losses, before counting profits
Opening a new trading position must be first of all about how much money may be lost and then what would be the profits. Good money management implies that trader is expecting to win at least twice as much as he could lose on each trade. This way being right only 50% of the time will still make trading profitable.Using good money management in Forex trading is hundred times more important than having any great trading system itself.

Forex traders' mind
And last but not least is trader’s psychology. Going in profit or losing money always create psychological challenge for trader to act responsively. Not being greedy and also cutting losses short is the key to this game.Trading Forex you need to accept losses. They are inevitable and occur in any money involving operations. Therefore, instead of battling losses trader needs to accurately analyze unfavorable situations and take lessons from losing trades.Every experienced trader would also suggest – there must be no attempts for revenge when losing money. Trying to return your money at any cost will put a trader in deeper troubles. Instead, the trader should return to trading rules and honestly analyze own mistakes, accept that the market was not in his favor and try to improve the trading plan for future success.

Successful traders are learners, what about you?
And finally, even successful traders are constant learners. Up-to-date knowledge about Forex market opportunities is what also makes them continuously profitable in their trading career.

Forex Scalping

Forex Scalping can also be called a quick trading. It is a method where traders allow their positions to last only for a matter of seconds, to a full minute and rarely longer than that.(As a rule if a trader holds to a position for more than a minute or two it is considered no longer a scalping, but rather a regular trading.)
The purpose of scalping is making small profits while exposing a trading account to a very limited risk, which is due to a quick open/close trading mode.
There wouldn’t be any point in scalping for many traders if they weren’t offered to trade with highly leveraged accounts. Only ability to operate with large funds of, actually, still virtual money, empowers traders to profit from even a 2-3 pip move.
How do they do it? Suppose a scalper opens a trading position of 100 000 units with EUR/USD. For each pip he will now earn $10… Closing in with only a 3 pip profit brings it up to $30 — not bad for less than a minute of work…
Now, you would probably ask what Forex brokers think about it, because if a scalper constantly wins, the broker would obviously sustain some losses.That is why the other popular discussion topic is always at scalpers’ attention: What Forex broker would allow you to scalp the market?
Obviously, dealing desk brokers would not agree with scalpers’ trading style and most likely will ask a trader to change his/her trading habits or to find another broker. But, even if a scalper stays in, there is another method to slow scalper's performance down and it is to set delays between an initiation of the order and its actual filling. The reason behind it is that dealing desk brokers need time to countertrade/process each order to prevent own losses in case a trader closes in profit.
The broker that will not object to scalping is the one that has the best trades processing automated platform. Using straight through processing there is no intervention between a trader and a market maker — the software is taking care of the whole business process. So, it’s more likely a broker with a “slow” business processing platform would object to scalper’s trading style.

Why Trade Forex

Take control of your own finances.Beat the returns from mutual funds, hedge funds or managed funds.
Start-up costs are low when compared with day trading stocks or futures.
Forex is the world’s largest market. No one can corner the market.
With a trading volume of around $3.2 trillion dollars a day( Bank for International Settlements April 2007), no single entity can control the market for an extended period of time.
You can make money when the market is going up or down.
Forex markets trade 24 hours a day. There is no waiting for the opening bell.
Technical analysis works very well and the market trends well.
Forex offers up to 100:1 leverage but it is wise avoid very high leverage if you can afford it. Stocks offer 1:1 or 2:1.Futures offers 15:1 leverage.
The forex market is the most liquid in the world. Traders can almost always open or close a position at a fair price.
You can make money working only a few hours a day or week on your computer.
You can trade from anywhere in the world where there is an internet connection.
You can gain experience without risking your own money by using a free demo account.
When trading stocks, there are over 40,000 stocks to choose from. In forex, you can choose one or two currency pairs and focus your analysis.