Trading in the Forex or Foreign Exchange market is not new. In fact, it has been one of the more profitable methods of investment for many decades now. Today, forex is traded online through many types of engines and platforms around the world. The intention of Forex was to be the driving element for trade and investment for a certain country in the global market.
Trading in Forex is similar to the stock exchange where one buys at a certain price and sells higher to earn a profit. As such, it is very much a game of risk as well. Unknown to many, forex trading actually started many generations ago. Before currencies existed, there was the Barter trading system before it was replaced by gold, silver and other valuable stones.
Coins and paper money were later introduced which formed the basis of today’s currencies. In the early ages, paper money was used which would then be used to convert to gold, the basic form of wealth then. However, there were problems with this system and to overcome it, foreign exchange policies were introduced.
The Bretton Woods Agreement was derived in the Second World War to solve the monetary crises then where a system for fixed exchange rates was introduced. In the Seventies, President Nixon abolished the gold convertibility of currencies while the EEC or European Economic Community established the fixed exchange system in 1979 before it grew to become one of the most dynamic and profitable markets in the eighties.
What is Technical Analysis?
Technical Analysis is one of the strategies involved in foreign exchange (Forex) trading. It is actually one of the common strategies involved in market trading activities in which this method is adopted in share market as well.
Technical analysis is among the most common strategies involved where it is usually adopted by the more seasoned traders. In Technical Analysis, what you want to do is to try and predict the price movements of a certain stock (in this context, currency) through analyzing the movements previously.
In most cases, Technical Analysis is used to obtain a big picture of a certain currency through looking at the historical trend of a certain period. To do this, it must be assumed that the certain economic health and political stability are both constant because they influence the outcome of the price.
This is mainly because while traders are aware the no single entity will control currency changes, the price of the currency will tend to follow the market trend of the moment. As such, if a certain currency has been increasing by 2.5% each 5 days for the past few months, then this trend is ‘expected’ to continue unless something major happens.
In simple terms, Technical Analysis involves looking at the previous historical trend of a currency with a view that it will continue either upwards or downwards in the near future. It is therefore not surprising that some traders actually gather these data that dates back as far as a century ago in order to understand the currency’s behavior.
What is fundamental analysis in Forex?
Fundamental analysis is one of the common strategies adopted in trading of foreign exchange or Forex. This is a term which is quite commonly used in many types of investments where it involves analyzing the market trends.
While fundamental analysis can be quite easily adopted, it would require some practice before the trader becomes good at it. As such, fundamental analysis is more commonly adopted by the intermediate to the seasoned forex traders
The first priority in fundamental analysis is to observe the current economic situation of the countries where the currencies are being traded. This actually requires experience as the trader needs to know the cause and effect of certain economic policies of a particular nation.
This is usually determined by the changes in economic and political situations. The trader must be able to foresee what actually happens through the economic policies like unemployment rates, inflation and others which can be obtained online. Despite the fact that there are certain theorists who believe that the forex market is based purely on supply and demand, it is actually more versatile because the currency level is controlled by a series of economic and political factors.
Other issues that need to be considered include the changes in GDP or Gross Domestic Product, Trade Balances and Foreign Direct Investments which are usually influenced by the government. When there is a change in government, all those issues will change accordingly.
It is therefore crucial to be aware of what is going on in the respective countries through round-the-clock news sources as the changes would determine the changes (sometimes major) in the currencies concerned.
What is Forex Pip?
In forex trading, it is very important to know some of the terms and jargons used. The Pip is one term that you must know if you are to venture into this market. It is short of Price Interest Point where a pip is used as the standard unit in looking at the exchange rate of a currency pair commonly adopted in forex trading.
Forex Pips are often displayed in 4-decimal numbers where if a currency moves a single 4-decimal point, it is considered to have moved a Pip. For example, if the currency pair of AUD/GBP moved from 1.5678 to 1.5679 then it has actually moved ONE PIP. It might look daunting as involving so many digits can sometimes be confusing but this is a common practice in forex trading.
It must however be noted that there are certain situations where a Pip only involves moving of 2 decimal point currencies which is when the Japanese Yen or JPY is used. In situations where brokers do not practice the 4 decimal point numbers and instead adopt a 5 or 3 decimal point number, it is referred to as a Fractional Pip or sometimes called a Pipette. For instance, if the currency pair of the EUD/USD moved from 3.12345 to 3.12346, then the USD is regarded to have moved One Pipette instead of the most common One Pip.
A Pip therefore is usually considered as 1/100 of a cent of the respective currency or can be expressed as 0.0001 cent. While it might look very small, take note that currencies are actually traded in lots of $100,000 which means that each time a currency moves 1 Pip, it is equivalent to $10 which means that if the currency moved 10 Pips, it is translated to a $100 profit and so on.
What are the tradable currencies?
The foreign exchange market functions similarly to other investment markets around the world while there are actually some distinct differences like what can be traded and how. Trading in Forex can be quite simple once you know the dynamics and how to trade.
Unlike the share market, the forex market allows you to trade only currencies which mean that you do not actually have that many options. Billions in world currencies are traded each day and the forext market has one of the largest online markets in the world today.
Trading in the forex market is more flexible in terms of capital and timing while trading stocks are more confined to the office hours of the specific country. The local bourse could have hundreds of counters and shares that can be traded but in forex, you will only trade the prices of the dollars and cents involved.
There are in general 4 most tradable currencies in the world today. The USD or US Dollar is perhaps the most recognized currency as it is the largest economy in the world. Meanwhile, the Euro Dollar (EUD) has become one of the highest traded currencies since it was introduced where it is used in most of the members among the EU. The Japanese Yen or JPY is the most traded Asian currency in the world while the British Pound or GBP is another widely traded currency as well.
Together, the GBP, JPY, EUD and USD form the group of the most tradable currencies which are mapped towards each other or other currencies around the world.
DOES YOUR INSTINCT WORK IN FOREX TRADING?
In Forex (Foreign Exchange) trading or any other forms of trading, impulsiveness can be very dangerous. In fact, being impulsive or depending on your gut feelings could cause a lot of losses if it is not curbed. In any investment method, the last thing you want to do is to base your decisions on your emotions because it is not calculated and very risky.
So does instinct play an important role in forex trading? You would have heard by now that some people have actually succeeded in trading impulsively and still came out victorious. This is usually a one-in-a-million case as nothing can be fully dependent on emotions.
If you are an impulsive or short-fused person, then you must not in any way base your trading on gut feelings or instincts. There can be a healthy mix of emotions and analysis but it will require a lot of patience.
As a trader, you will surely have identified certain currencies which you feel could perform. That would be as far as your instincts should do. After you have that ‘good feeling’ about the currency, then you must carry out proper investment strategies.
Carry out a Technical Analysis and see what your prediction is. From there, you know how accurate your instinct will be. If you are accurate then you can proceed with caution. Try to do this a few times and if you actually have a good record, then perhaps you can consider the same method in your next trade. If you have more misses than hits, then your instincts are not accurate at all, so ignore it.
DOES WORLD EVENTS AFFECT THE FOREX MARKET?
If you are a forex (foreign Exchange) trader, you will know by now that there are many factors that affect the currency market. In fact, there are actually certain minor events that could cause a major movement within the market which could sometimes be very damaging to your investments.
In Forex, it is very important that the trader knows what is going on in the global market because it involves the movement and changes in international currencies like the US Dollar, the British Pound, the Euro Dollar and Japanese Yen, among others.
The rule of thumb in forex trading is that you cannot afford to be ignorant about what is going on around you. You can be a very systematic trader who adopts technical and fundamental analyses but those are strategies that work well in stable economic and political scenarios.
As such, knowing which economy is not doing well, which country is having an election and which one has been producing weapons will help you in knowing which currency will have a major change. One of the biggest challenges in this is that world events are often unpredictable because something can happen within a split second. The 9/11 attack is one such example which happened without any warning or prediction. The tragedy caused many world markets to crash and currencies to suffer. As such, it would be most ideal if you are fully aware and kept abreast of world events while practicing caution whenever you trade in the forex market.
PRACTICAL FOREX TRADING TIPS FOR BEGINNERS
Forex or foreigner exchange trading has been one of the methods of investments for many decades now and with the availability of this platform through the internet, it has become more popular and surely more accessible now.
Trading in the forex market is not the same as how it is done in the share market where you will need a lower sum of capital. In fact, some online platforms actually provide free credits while some require as low as USD100 to start.
So if you are considering this option to earn a little extra, then you should be aware of certain tips. First, be cautious about scams. There is no such thing as a ‘get-rich-quick’ scheme or a forex robot that can ‘sure win’ for you. Whatever platform you use, as long as there is money involved, be very cautious.
There are hundreds, if not thousands of forex software in the market. Evaluate them properly and find out which are the ones best for beginners and start from there. If required you can attend trading courses and workshops to help you get started quicker. If you do not have time to attend the sessions, you can always enroll into online courses or download e-books on online forex trading.
Learn the strategies. There is no one-step to success. You need to practice. The best way to do this is to use the live demo account as much as possible. Then apply the strategies that you read about, like fundamental and technical analysis and then start small. Ultimately, don’t be greedy.
STARTING A FOREX HEDGE FUND
Trading in Forex or Foreign Exchange can be very profitable and lucrative if you know how and have the relevant experience. One of the methods to kick-start your campaign is to set up a forex hedge fund. You will first need to know who your investors are before setting up the hedge fund while learning about the fees, taxation and some common trading strategies in order to start earning through this model.
In terms of trading strategies, there are the traditional and non-traditional methods. Apart from that, you can adopt the pooled investment engines as well.
Because of this, you need to know who your investors are because you will be trading on their behalf. Apart from that, you need to know the 2 types of taxation, namely pass-through taxation and charges for performances.
Once you have those issues determined, then you need to start calculating the initial investments. From there, you can then decide on the periods required for withdrawal and deposit which can come in periods like yearly, quarterly or monthly.
It must be noted that only parties like lawyers, accountants, consultants and the forex broker can be involved offering the hedge fund. You need to have all the related experts before starting out. Documents that will be needed include the LPA or Limited Partnership Agreement, the PPM or Private Placement Memorandum and any other subscription-related documents.
Then register as a CPO of Commodity Pool Operator and then start planning your trading strategies. You must ensure that you have all other documents in your possession to avoid any complications if they arise.
WHAT ARE THE FOREX SCAMS?
When it comes to money and investments, there are always parties in the market which will try to cheat you off your earnings. Scams as you know it are all around the market. Whether it is an investment or a savings account, news reports on people who were victims to financial scams have been surfacing almost on a daily basis.
If you are starting out in the forex (foreign exchange) trading market, chances are you will come across several schemes that can ‘help’ you earn your profits faster and more guaranteed. You will need to be more street-wise with this and learn to identify if such schemes are real or scams designed to cheat you.
The truth is some of the forex scams are legitimate which means that they did not break the law. All they did was fabricated the truth and it is the victim who willingly paid the money. Cyber criminals take advantage from forex traders who have grown too greedy.
One type of scam is when traders become victims of ‘miracle software’. There really is no such thing as software that can ‘double’ your profits. After all, no one can determine the outcome of the forex market accurately, so there really isn’t any software that can do that either.
Signal sellers are those that you must be wary of. These are the companies which try to pull you in, claiming that they have ‘insider tips’. The rule of thumb here is that if a company claims to have ‘insider tips’, that is one you should not engage.
The HYIP or High Yield Investment Program is another popular scam today involving the forex market. It is often referred to as the Ponzi scheme which has been outlawed in most countries where they ask you for an investment first with a promise of high returns only to escape with your money.