The foreign exchange market determines the relative value of different currencies. the price of a currency is actually a reflection of what the market thinks about the currency and future condition of a country's economy compared to other economies.
When you buy US dollar with British Pounds, you are in fact buying shares of US economy, expecting the US economy to out perform the UK economy.
In short the main task of a forex trader is to buy a currency pair when exchange rates are expected to rise in the future, then sell a currency when its exchange rate is expected to fall.
CURRENCY PAIRS
Are divided in major, crosses, and exotics. Major represents develop economies and are highly liquid with low spreads. they are stable and predictable in relation to other asset classes such as small cap equities and stocks. Major includes EUR/USD, GBP/USD/ USD/JPY, USD/CHF, USD/CAD, AUD/USD and NZD/USD
Crosses do not include the US Dollar in th ecurrency pair and are ideal for diversification. Crosses include GBP/JPY, EUR/GBP, CAD/JPY, AUD/CAD, EUR/AUD, and NZD/JPY.
Exotics include a currency from a developing country, so they are extremely illiquid with very high spreads. Examples include the Hong Kong dollar(HKD), Singaporean dollar (SGD), Russian Ruble (RUB), the Indian Rupee (INR) and more. Also, the currencies of the Scandinavian countries are considered exotic, although they represent develop economies.
There are many traders who successfully trade other types of pairs too, but a general rule of thumb for beginners is to start off trading the most common currency pairs.
HOW TO READ QUOTES?
EUD / USD
1 / 1.1302
Currency pair quotes may sound confusing at first, but reading them is actually pretty straight forward. in the example above the EUR quote of 1.1302 show how much 1 EUR is worth in Dollars. This means that one EURO is worth 1.1302 US Dollars. The base currency is always the first one listed in the pairing
PIP
Price Interest Point represents the smallest change in the currency pair. Typically, it is the fourth decimal point, although many brokers quote using the fifth decimal. However the fifth decimal doesn't really affect the price as it changes really quickly.
currency pairs that include the US Dollar, a PIP is 1/10,000 of the Dollar, whereas when the currency pair includes the Yen, a PIP is 1/100 of a Yen because the Yen is closer in value to 1/100 of other major currencies
SPREAD
The difference between sell quote and the buy quote (in pips). The higher the liquidity of a currency, the lower the spread.
WHAT INFLUENCES CURRENCY RATES
CENTRAL BANKS
- Interest Rates
- Quantitative easing
NATIONAL ECONOMY
- GDP, inflation, deflation
- Trade balance reports
- Employment statistics
POLITICS
- Stability of government
- Public statements
- Change of official
- Military conflicts
In Forex, all information are transparent and instantly available, and, therefore, trading decisions are based on real facts and not just inside information like in the case of the stock market. Also, economic factors likethe interest rates and inflation are accuratelyand instantly released by reliable sources like Reuters, Economist, Bloomberg etc. but also from governmental agencies. Economic data can really caused market fluctuations and forex brokers can take advantage of the situation to realize a profit.
LEVERAGE - THE GOLDEN TOOL
Through the use of leverage, you can invest a small amount of money while trading larger positions through a loan from your broker. when the trade closes your broker deposits the money into his account. All processes are made automatically through the trading platform. Leverage is presented in the form of a multiplier that shows how much larger the open position is against the margin (the actual investment amount) when it is opened.
The typical options of leverage in forex include 50:1, 100:1, and 200:1, In the US the maximum allowed leverage is 50:1. Anything above 200:1 is considered very high risk. Here's an example to illustrate how leverage works. In order to open a $10,000 position you can use a margin (investment) of $200 with a leverage of 1:50 ($200 x 50 = 10,000).
Using leverage allows you to increase the potential of realizing a profit between 50 and 200 times faster but the potential for loss is the same. We recommend using caution and starting off slow.
HOW TO CHANGE THE LEVERAGE
The best platform enables you to edit the leverage level and margin of each position to suit your personal risk-reward strategy with just one click.
TIPS AND WARNINGS
- Never risk all your money in one transaction. Experience Pros typically recommend diversifying your risk by spreading out around 5% of your total deposit per trade.
- Start slow at first, so that you can build both experience and confidence in tradin. You can always increase leverage and profit as you learn the ins and outs of forex.
- Set up a stop order loss, which tells your broker to sell a currency if it hits a certain price. While its great to think positive and trust your trading strategy to open trades, it's just as important to consider the worst scenario and determine how much you are comfortable losing on each trade.
- The leverage available on positions carried over the weekend, make sure your margin is sufficient to avoid a margin closeout.
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