25/03: Basic Introduction To Forex Trading

As the title says, this is indeed a very basic introduction to Forex, and yes, I realize not really related directly to internet marketing, but as I talk about making money online and have mentioned stocks on here before, I thought a piece about currency trading might be of interest.

I should start by saying that the world of currency trading is a complex one and it takes time and study if you are to have a chance of becoming successful. Having said that, there is a lot of information out there for beginners designed to make things easier - so much in fact that it can often have the opposite effect and leave potential traders mired in doubt and confusion. I'll give a couple of recommendations a bit later of the places I have found most beneficial in the learning experience.

I should also add that I am in no way shape or form an experienced Forex trader, but I have been doing my homework with a view to taking it up seriously at some point in the future. At the moment it is not a core business of mine, but a venture I have embarked upon in a limited way. More of that in a bit.

In my studies I have noticed several things about Forex, the people it attracts, and some of the many pitfalls encountered by the inexperienced.

Forex is often touted as a way to quick riches, an easy way to make large amounts of money online and a panacea for all financial ills. If you believe this, then you are probably going to be one of the many who get burned in their eagerness to turn your fortunes around in a short space of time.

So, what is currency trading and how do you get into it? In very simplistic terms, Forex (Foreign Exchange) involves the buying and selling of currency "pairs", for example the US Dollar and the British Pound, or the Euro and the Japanese Yen etc. in a variety of combinations. Traders buy or sell these pairs, effectively speculating in a rise or fall in the price of one or the other with the aim of profiting from the trade. For more detailed explanations see the recommended sites at the foot of this post. 

The currency exchange is open 24/7 and unlike the stock market there is no physical "currency exchange". Money is traded electronically by banks, companies and individuals all around the world, the market opening on Sunday night and not closing again until Friday afternoon. Obviously there are busier times than others, in particular when the three main markets are open, those being in New York, London and Tokyo.

Currency trading was once the province only of those with millions of dollars available to them but with the advent of the internet the market opened up to a whole new range of speculators in the 1990's.

So, there is a very brief background. For individuals wanting to try their hand at currency trading, all you need nowadays is a high speed internet connection, some money to invest and the services of a broker. Don't be alarmed, there are a huge number of brokers available online today and signing up is made very simple, because all of them are competing for your business, no matter how small a fish you might be. You can sign up with a broker online and literally be trading in a few minutes.

OK, let's stop there for a minute. Yes, it is very easy to get started, but rushing into Forex is a recipe for disaster for the inexperienced. Many online brokerage services now offer new account holders the ability to trade with virtual money. This is a major step forward because now, beginners can start learning about fundamental and technical analysis, place trades, understand trends, and do it all in real time without risking any of their own money. There are plenty of people out there who have no desire to risk any of their own cash and just "play" in these virtual trading arenas for fun and even occasionally profit by winning competitions and the like. Nothing wrong with that, and for the online brokers, every single "player" is a potential trader of the future so they don't mind the players either.

At this point I should explain that there are no commissions as such payable on trades. The brokers earn their money through something called the "bid-ask spread". Basically each time you make a trade, there will be a cost to you called the spread which will vary dependent upon several factors including the amount of your trade, the leverage you apply and the currencies being traded. Just remember that the spread will be deducted from your eventual profit or added to your loss. Sounds like a commission but "you say tomato and I say tomahto" etc. so just be aware that every trade you make will cost you the spread amount and your profit is gross of this fee.

You can open an account with a broker for less than a hundred dollars nowadays but here are a few few basic cautions to keep you rooted in reality.

1) Opening an account and trying to trade with $50 is not going to make you rich. It can be done, but it certainly won't make you gazillions of dollars and it really can disappear in a few horrible seconds if things go against you. Most people will tell you that starting with less than $1000 is a waste of time but like many things, it's a matter of opinion.

The fact that you can open an account for a minimal sum is really only because they want your money :-) 

2) Whatever you deposit into your trading account, it must be money you can afford to lose. Seriously. Don't trade with your household budget.

3) Trading without any kind of plan is nothing more than gambling and this approach will see you get burned with Forex. You need to spend time learning how it all works and then planning your moves.

4) Leverage - this is basically what allows you to control much larger amounts of money than you actually have, in order to benefit from the relatively small moves in currency values. An example: You decide to trade a pair and put up $25 and the broker allows you to leverage this amount by X100 X200 or X400 for example. This means that you can multiply your money by up to 400 times i.e. $10,000 and trade with this inflated capital.

Before you get too excited at all those zeros though here is the reality again. Although you can never lose more than your investment ($25 in this case) and there is no limit on your profit, trading with such a miniscule amount is not very wise. Currency prices fluctuate constantly, going up and down often countless times a minute. This is a huge problem if you are only putting down very small amounts, because even if a currency price is generally trending in your favor, any small dip or rise against you will very quickly "bust" your investment.

If you go for high leverage/higher risk, the cost on the spread will likely be a fair chunk of your margin. Let's say in our example the spread is $9.50 - that effectively reduces your $25 to only $15.50 and if the pair you are trading takes a sudden dip, your trade can be over in seconds, as soon as you are down by $15.50 the trade will close out and you lost all your money.

The fact that the trend picks back up and continues as you had cleverly predicted matters not, because you are out of the game and watching the trade go back to its nice upward trend that would have resulted in a profit for you will be downright depressing. If you go and play with a practice account somewhere and try it, you will see exactly what I mean - you can be watching your profit, sipping your coffee, feeling smug and bam! The price dips drastically for a few seconds and it's over for you before you even have a chance to swallow.

So, trading with very small amounts will not make you rich, and it is doubtful you will make any real gains. Just because it's available does not make make it advisable - remember, the broker gets paid whether you win or lose.

As with most things, the greater the risks you take the higher the potential gains, but also the higher the potential losses and it is said that over 90% of people who trade Forex do not make any money and, in actual fact, lose money

Approached with the right mindset, a willingness to study and some patience and thought, there is no reason why you should not start trading Forex though. If all of the above makes you think that it's all bad news, it isn't and you can make money with a relatively small amout of capital if you are careful.

I know because I've done it myself, so let's end on a cheerful note. One morning last week I got up, turned on my PC, checked my various accounts and headed over to my trading site. I was waiting on the London market to open and felt that I had spotted a good potential trade. I placed a trade using $100 and leveraged it to the maximum allowed and within fifteen minutes I had made a profit of almost 200 dollars. Needless to say I closed the deal and took my money.

When looked at in these terms, it is hard to believe that earning $200 a day in any job I could get nowadays would involve a lot of work, but that one little trade earned me a day at the beach and a six pack to celebrate. Could I do that every day? Well, I dont try to be honest and the truthful answer is "probably not", because you are never going to win every trade you make, even if you're the very best. I think one of the biggest secrets of not losing too much is to never be too greedy.

Big time investors will probably chuckle at this point but if you're playing with a small chunk of capital, just don't expect to give up the day job after a few weeks.  If you're content to make some useful extra money though it can be done.

Reality check - the next day, I got up all full of confidence and placed a careless trade to see $100 of my capital gone in a matter of 2 or 3 minutes. Yes, it happens very quickly on the Forex and fortunately I pulled out before too much damage was done. But the fall on that occasion was so fast that between clicking my mouse a couple of times the loss had become even greater than the point I decided to quit. Too small an investment, and too hasty a trade with no real planning or research. Bad idea.  

If you're making $100 plus a day on Adsense I'd stick with that (zero risk) but if you're loooking for alternative ways to generate income online Forex might be another avenue to pursue. Just be realistic in your expectations, visit the places I recommend below and you stand a good chance of doing it right and realizing some profit from the Forex.

The last "real" job I had paid me a lousy fifty pounds a day on average in the UK - less than seven pounds an hour and I worked a lot of hours, often six days a week. For me, to be able to make a couple of quick and profitable trades that net me up to $100 in a day, I'm happy enough, even if I can't do it every day. I decide when I'll take my money if I'm in profit - if in the space of an hour I've made $20 or $50 on the deal and had promised myself that's where I'll quit, then I do, even if the price looks set to go even further in my favor. I believe in quitting while I'm ahead and a good day's pay is all relative after all.

Longer term trading is for those with generous capital and a lot of skills and they can earn/lose big money. That may sound such small time to more experienced traders, but in these hard times every penny counts. For most of us, taking the "slow and steady wins the race" is a necessary part of learning to win far more often than you lose. If you have the luxury of being able to sit at your computer and monitor your trades for every second that they are open it is possible to close them the moment things are looking good or turning for the worst.

OK. don't get the idea that trading currency is easy - it isn't but it is possible and it can be a lot of fun, especially if you have an analytical mind. Some people will tell you it's gambling, and for many people it is and that's why they lose money.

If you are interested in finding out more, probably the very best resource on the internet for beginners to Forex trading can be found at Babypips.com. I learned a huge amount from spending time at their site, all at my own pace in their "Forex School".

Then, if you would like to try your hand at trading with virtual money, I have found this site to be the easiest to use and learn as a currency trading beginner. The biggest problem with it is reliability and it can sometimes be unavailable due to server and software issues, but fortunately this doesn't extend to people with real accounts trading real money as the real accounts run on different servers. You can register for your free Forex practice account here. If you eventually decide to go for live trading it is simple to fund your account and you can even use Paypal for deposits and withdrawals. However, I recommend if you are serious you do your homework and find a good broker and trade using the excellent MetaTrader4 platform

The downside of the Etoro platform is that the charting features are not much use, and it won't appeal to a serious trader because of it's cutesy animations and interface. You can find excellent free forex charting at various places including:-

Live Forex Charts at Forex Capital Markets

Free Forex Charts at XE.com

FreeForexCharts.com

DailyFX.com Free Live Forex Charts

However, if you decide to take up trading seriously, with your own money, you would be better off finding a more serious platform and a broker recommended by more experienced traders. You can find plenty of feedback on how to find a broker and all the trading platforms available at Babypips.com and I recommend reading through their forums if you are a beginner. Personally I think Oanda.com is one of the best for your first account and the free demo is very user friendly.

You will also find daily Forex news at DailyFX.com and ForexTV.com which are both good places on the web when you start trading and need up to the minute economic and financial news that affects the currency markets.

One last tip, when or if you open a practice account, trade as if it were your own money and keep in mind how any losses or gains would really affect you. Just because you are given $50,000 to play with doesn't mean you should use it as it will skew your perception of what your chances and results will be if you start trading for real. If you are thinking of investing $1000 or even just a couple of hundred, play with those parameters and learn what you can realistically expect. Make sure you understand margins and leverage too, because they can bite you very hard.

You can also find a large range of Forex tools, training material and software here

So that's your very basic introdution to tr,ding currencies online, I hope that you have found this post informative and a refreshing difference from my regular menu. There is a lot to learn before you should consider trading for real so don't ever believe that it is something you should jump into overnight. Your comments and thoughts are always welcomed.

Footnote: I have had a few emails asking me for recommendations and what I use etc etc. I'm afraid that it's not something I like to get into because Forex is not for everyone and I don't wish to be held accountable when someone loses all their money! All I will say is that I use MetaTrader4 as a platform and yes, I do use an Expert Advisor, but I steer well clear of auto trading robots, most of which I don't trust at all.