Team GamesThe fundamentals of Fx trading

Archive for May, 2009

Forex Currency Trading: An Introduction

Forex, foreign exchange and fx trading are all different names for currency trading, where one currency is exchanged for another in the hope of making money when the exchange rates change. These rates are constantly changing due to market news, national events or a knock on effect from changes in the stock exchange.

At the most basic level, imagine you exchanged some US dollars for British pounds. You might give $100 to buy £65. Then the rate changes in your favor so you exchange them back again. Now with the new rate you get $102 for your £65. You just made $2 or 2% of your investment.

Currency traders do this kind of thing all of the time with the aim of increasing their funds through many small trades. They trade on margins so that they can control larger amounts with only a small investment. In the above example, you might only have to hold $10 in your brokerage account to make the purchase even though the amount is $100. The broker covers the rest on the assumption that the market is unlikely to change by more than 10% in a short time.

Forex trading has been around for over 30 years but until the rise of the internet it was almost entirely in the hands of banks and other institutions with large investment funds. These days ordinary people can get involved on their home computers although the financial institutions are still the major players. When I tell you that around US $4 trillion changes hands every day on the currency trading markets you will understand that only a small part of this belongs to ordinary people like you and me.

Foreign exchange is a worldwide market and because of the different time zones around the world you can trade almost any time. Sydney, Australia is the first currency exchange market to open each day, and by the end of the business day in New York the Sydney market is open again for the next day’s trading. So for 5 days per week this is truly a 24 hour market. It only closes on weekends.

You are not limited to dealing in your own country’s currency so if your national economy is in a very unpredictable state you can switch to trading two other currencies that are a little more stable. While it is true that a volatile situation with big fluctuations can give you big profits in a short time, it is extremely risky to get involved in a currency that is experiencing a crisis.

These days brokers are going all out to attract the new type of home investor who does not have a lot of capital, so you can get started with just a few hundred dollars. They will provide you with software that allows you to make trades on your account, and real time market information including charts to show you the direction of movement of the different currency pairs.

With so much money changing hands every day, foreign exchange is a high liquidity market. This means that your capital will not be tied up for the long term as it might be if you bought certain kinds of stocks.

Apart from some funds to invest, the main things that you need to get started with currency trading are good money management skills, self discipline, a profitable system to follow and perhaps a forex robot to apply your system for you. When you have these in place, currency trading can be fun and quite profitable.

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Wednesday, May 27th, 2009 Introduction No Comments

A Quick And Easy Foreign Exchange Tutorial

Your first foreign exchange tutorial will cover the basics of what you need to do to get started with forex trading. The aim, of course, is to have you making money by predicting the rise and fall of one currency against another and opening and closing your trades at the right moment.

It takes time to learn to be a successful forex trader but you can cut corners if you have a good introductory program that covers everything you need to know. This includes:

- understanding the principles of currency trading including managing your account, trading margins, and allowing for the cost of the spread

- technical analysis: discovering how to recognize trends in the markets, the different types of charts and how to interpret them so that you can profit from market movements

- fundamental analysis: understanding what to do in the face of major national or international economic events that are likely to impact on currency values.

- finding out how to minimize your risk and protect your trades with stops

- developing the power to apply your system without allowing losses or emotions such as fear to throw you off balance and affect your chances of earning long term profits

A good place to pick up hints and tips can be a forex trading online forum. There are many of these on the internet and members will comment about all kinds of issues relating to the market and their own trading. This can be a great place to go if you have questions.

However, forums have some drawbacks. One is that the advice you get may be very contradictory. There is more than one way to trade forex profitably and it can be confusing to be receiving advice from several different people, each with their own approach. It is usually better to stick to your own system.

The other problem with taking advice on forums is that you do not usually know anything about the people who are posting. Somebody could sound very knowledgeable and then it turns out they have only ever used a demo account and never made a real trade in their lives. Some people spend more time hanging out in forums than trading. Just because somebody is very active in a forum does not mean he or she is an expert.

So do not rely on forums, free guides or untested theories for your trading system. When you are starting out in forex trading you need a solid grounding in the basics and a system that is easy to follow and actually works. As with most things in life you usually have to pay for the best. So look for a foreign exchange tutorial that is part of a profitable forex system.

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Tuesday, May 26th, 2009 Introduction No Comments

What Are The Risks With Fx Managed Accounts?

Forex managed accounts present an attractive opportunity for people who want to make money from the lucrative currency trading markets but cannot or do not want to learn to trade for themselves. With a managed account you do not have to do any trading at all. Instead, you entrust your fund to the management company who will act for you.

There are two basic types of forex managed accounts.

1. Standard accounts

With this type of account, your money is kept in your brokerage account in your own name and the manager simply has control over it so that they can trade with it. You can see how much is there and how it is doing at all times. It remains your money.

You have to accept the risk that even a skilled account manager cannot predict the markets 100% and you may have to take some losses. Still, if you are a beginner, he is likely to do better with your money than you would yourself, so it is just a question of whether he can do well enough to cover his fees and make you a good profit.

2. Pooled accounts

Pooled accounts are more risky in that there is more possibility of fraud. Here, your money goes into a pool held by the account manager. You are paid a share of their declared profits.

In theory the pool provides a buffer so that profits and losses are more evenly spread and your income could be a little more predictable than when your money is being managed separately. The problem is that you cannot really know what is happening and an unscrupulous management company could simply be making small regular payments to keep their customers happy while illegally diverting the bulk of your funds into their own pockets.

If you are guaranteed a certain percentage return on investment by a forex account manager using pooled funds, you could be heading for trouble. There are no guarantees with forex trading and any company that makes promises of a 10% return or whatever should be treated with extreme caution.

Of course there are some well run pooled accounts and they have the advantage of a little more predictability than standard forex managed accounts. However, you should research a company offering pooled accounts even more thoroughly than usual before you decide to invest.

Even if you choose a standard account, you need to shop around. Avoid managers who insist on you signing up with their preferred broker. That usually means that they get a commission on all your trades, so they have an incentive to make a lot of small trades even if that is not the most profitable strategy, simply to increase the broker’s earnings from the spread and their own commission rakeoff. Even if their commission is worked on a different basis, you probably will not get the best or cheapest broker that way. It is better to sign up with a company who will let you choose your own broker for forex managed accounts, even if they charge a slightly higher fee.

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Tuesday, May 26th, 2009 Managed Accounts No Comments

What Are The Risks With Forex Managed Accounts?

Forex managed accounts present an attractive opportunity for people who want to make money from the lucrative currency trading markets but cannot or do not want to learn to trade for themselves. With a managed account you do not have to do any trading at all. Instead, you entrust your fund to the management company who will act for you.

There are two basic types of forex managed accounts.

1. Standard accounts

With this type of account, your money is kept in your brokerage account in your own name and the manager simply has control over it so that they can trade with it. You can see how much is there and how it is doing at all times. It remains your money.

You have to accept the risk that even a skilled account manager cannot predict the markets 100% and you may have to take some losses. Still, if you are a beginner, he is likely to do better with your money than you would yourself, so it is just a question of whether he can do well enough to cover his fees and make you a good profit.

2. Pooled accounts

Pooled accounts are more risky in that there is more possibility of fraud. Here, your money goes into a pool held by the account manager. You are paid a share of their declared profits.

In theory the pool provides a buffer so that profits and losses are more evenly spread and your income could be a little more predictable than when your money is being managed separately. The problem is that you cannot really know what is happening and an unscrupulous management company could simply be making small regular payments to keep their customers happy while illegally diverting the bulk of your funds into their own pockets.

If you are guaranteed a certain percentage return on investment by a forex account manager using pooled funds, you could be heading for trouble. There are no guarantees with forex trading and any company that makes promises of a 10% return or whatever should be treated with extreme caution.

Of course there are some well run pooled accounts and they have the advantage of a little more predictability than standard forex managed accounts. However, you should research a company offering pooled accounts even more thoroughly than usual before you decide to invest.

Even if you choose a standard account, you need to shop around. Avoid managers who insist on you signing up with their preferred broker. That usually means that they get a commission on all your trades, so they have an incentive to make a lot of small trades even if that is not the most profitable strategy, simply to increase the broker’s earnings from the spread and their own commission rakeoff. Even if their commission is worked on a different basis, you probably will not get the best or cheapest broker that way. It is better to sign up with a company who will let you choose your own broker for forex managed accounts, even if they charge a slightly higher fee.

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Monday, May 25th, 2009 Managed Accounts No Comments

Forex Real Time News Trading

Forex real time news trading is a way of making money on the forex market from international events and upcoming current affairs stories. Predicting the way that these events will go and their effect on the currency markets can appear to be very profitable, at least in theory. The problem is that in practice things do not often go the way that you might expect.

The truth is that when it comes to financial news, the major international banks pretty much always make sure that they are the first to hear. When an expected report is released they will have people right there. The trade-from-home little guy, on the other hand, has to wait a few crucial minutes for the report to appear on the TV news or the internet. Even seconds can make a difference.

At times like this the markets will change so swiftly that you cannot really hope to jump in and make money. The banks will dominate the markets and although you may sometimes be lucky, you could easily be wiped out if the news goes against you.

In practice if you do want to trade on the outcome of an upcoming event such as an election or a financial report, you are more likely to try it by opening a trade before the announcement. You might have a strong belief that it will go one way or the other. However, you cannot really know for sure. When you think about it, opening a trade at this time is really nothing more than betting on the outcome.

It is at times like this that we tend to be easily carried away by our own ideas, hopes and emotions. It is can be very difficult to make a rational assessment of a situation where so much can ride on the outcome. Therefore, unless you are really in the thick of the financial news centers, it is probably best to avoid this kind of trading. A system that makes steady profits over a period of time is the best way for most small traders to operate.

Of course you must still keep one eye on the news while you are actively trading, but instead of aiming to make money from current and upcoming events, you are more likely to want to close out on your trades before certain reports are released. Critical times include the opening of the stock exchange in the countries whose currencies you are involved with, and announcements of interest rate changes in those countries. In addition, the USA is such a major player in the forex markets that events in the USA can affect all currency pairs, even if you are not trading the US dollar. You will probably want to avoid being caught with an open trade at all of these times.

For this reason, most traders who operate a sound forex trading system will avoid trading altogether in the extremely uncertain times preceding a major announcement or release of forex real time news.

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Sunday, May 24th, 2009 Introduction No Comments