Thursday, September 27, 2007

Introduction to Forex

Forex - The Foreign exchange rate market.

FOREX or The Foreign exchange rate market is an international market where various currency exchange transactions take place; this is in the shape of simultaneously buying one currency and selling another. The most commonly traded currencies are referred to as “Majors”; over 85% of daily transactions on Forex trading involve the Majors. These seven currencies are the US Currency (Dollar, USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD) and Australian Dollar (AUD). The Forex system in operation today was established in the 1970s when free currency exchange rates were introduced, this period also saw the US Dollar overtake the British Pound as the benchmark currency. Prior to this and in particular during World War II, exchange rate remained more stable. Forex trading in simplest terms is the buying of one currency and the selling of another.

Forex trading, also referred to, as “FX” is open to corporations, small businesses, commercial banks, investment funds and private individuals, it is the largest financial market in the world averaging a daily turnover of over $1 trillion dollars, making it a diverse and exciting market. It is a 24-hour market enabling it to accommodate constant changing world currency exchange rates . According to New York time, trading begins at 2.15pm on Sunday in Sydney and Singapore and progresses through to Tokyo at 7pm, London at 2am and reaches New York at 8am. This leaves investors free to respond to global political, economic and social events when they take place, day or night.

What currencies can you Trade?

In Forex, you deal with currency pairs. There are four main currency pairs: British Pound and USD (GBP/USD), Euro and USD (EUR/USD), USD and Japanese Yen (USD/JPY), USD and Swiss Frank (USD/CHF).

In each currency pair, the first currency works as the commodity and the second one works as the money. For example when you choose the GBP/USD to trade, if you buy, you buy British Pound against USD and if you sell, you sell British Pound against USD. It doesn’t matter what currency you have in your account. The trading software makes the exchanges automatically.

How can you make money?

Buying cheap and selling expensive or selling expensive and buying cheap is the base of making money in Forex. For example If you buy GBP against USD when each GBP is equal to 1.9554USD and then sell it when it is 2.0235USD, you have made a profit. I don’t want to focus on more details in this article and explain how the profits and the money you make will be calculated. I will talk about these issues in other articles.

But the big question is that how you can know the best time to buy and how you can know that if you buy, the price will go up and you will make a profit. This is the most important question that makes you a successful trader.

There are two methods to know the optimum time to buy and sell: Technical and Fundamental analysis.

In technical analysis, you can predict the direction of the price using the analysis you make on the price chart and also with the help of some special tools that are called Indicators.
GBP/JPY price chart with three indicators: Stochastic, MACD and CCI

Technical Analysis is a science and if you want to start working on Forex, you have to learn it properly especially if you want to work as an intraday trader. It is not too hard to learn the technical analysis. If you are a focused and serious person, you can learn technical analysis in a few months. There are a lot of free resources over the web that you can use to learn. There are some expensive training courses but those who sign up for them are not happy and believe that they have learnt nothing. So don’t waste your money. If you are serious to learn, there are a lot of free resources over the Internet. You can also visit this web log every now and then or subscribe for my RSS feed. I will try to share my experiences with you.

The other method is the Fundamental Analysis. This method is used to predict the future of currencies prices according to the economic and even political situation of the world and important developed countries like USA, UK, Germany, Japan and … . Fundamental analysis has a long term usage but good traders can predict the sudden changes that happen after releasing an important news about economic situation of an important country. For example when the news says that economic situation of USA is improved for 5% in comparison to the last month, USD will become stronger and people start buying it. So the value of USD will go up because of the sudden increase of demand. If you know the effect of the news on the price, you can take the proper position and make money. Of course there are two sides in this story which means if you take the wrong position, you will lose.

Good and experienced traders take the advantage of both technical and fundamental analysis whereas 99% of traders are dependent on the technical analysis.
Some good things about Forex:

1- Forex is an online home based business that doesn’t need referring, recruiting and advertising. You only deal with the currencies through the Internet. So you will not have to reply any email, make any phone call and spend any money on advertising.

2- If you learn the Forex properly, you can make a lot of money. Forex can be your full time job that makes thousands of dollars for you every month. I have to emphasize again that if you start working on Forex before you learn it properly, it can be risky and you will lose your money. It is like the driving. If you drive a car before you know how to drive, you will hurt yourself and others but if you learn it properly first, it will be pleasant and funny.

3- You can make a lot of money by spending a small amount of money. Unlike other investments like stock market that you have to invest a lot of money to make a reasonable profit, you can make a good income through investing small amount of money. For example, with a $5000 account, you can make about $5000 per month. Of course it highly depends on the way that you trade and the strategy that you follow but good and experienced traders can double their money every month.

4- Forex - and of course stock market - are the only businesses that competition has positive effect on them. It is amazing, isn’t it? Competition is the biggest problem in all other businesses but in Forex, it helps the traders to make more money. Why?
Supply and demand are the factors that determine the price in any market. When there are too many buyer and sellers, the price volatility will be much higher and the market will be more dynamic. The price will go up and down more frequently and this is what we need to make money. When the price goes up we buy and when it goes down we sell and make profit.

So if you choose Forex as your business, you will not have to be worried about competition