Foreign Currency Trading, Foreign Currency Investments, Foreign Denominated CDs, Futures Accounts   Foreign Currency Trading, Foreign Currency Investments, Foreign Denominated CDs, Futures Accounts 
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Foreign Currency Trading

Home > Foreign Currency Investments > Foreign Currency Trading

Foreign Currency Trading, Foreign Currency Investments, Foreign Denominated CDs, Futures Accounts
Originally, only very large enterprises had access to the foreign exchange trading (forex / fx / currency) trading in the inter-bank business, the largest and most liquid financial market in the world. In this market, currencies up to a value of around 1,500 billion USD are bought and sold by its approximately 200,000 world-wide participants every day and 24 hours per day.

In the past few years this highly attractive market has become more and more accessible to individual clients. The market participants, who are linked world-wide by modern communication systems, control the prices (rates), as this market too, follows the laws of supply and demand.

As a result continuous changes in rates are seen. Foreign exchange trading (buying and selling of different currencies) consists of making profitable use of these market fluctuations on the basis of well-tried currency trading models. The special advantage of this investment as opposed to traditional investments such as fixed interest shares etc. is that profits can also be made in case of the USD falling instead of rising compared to other currencies.

A deal is concluded between two different currencies, with one currency theoretically representing the loan currency (debit) and the other one the investment currency (credit). Results are limited to the amount of the difference between the entrance and exit prices. It is possible to trade using 100 times or more of your own capital. This is called leverage or gearing. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit. This may as well work against you as for you.

Trading successfully is no simple matter. It takes time, market knowledge and market understanding and a large amount of self restraint.

Anyone who says you can consistently make money in foreign exchange markets is not being truthful. The Foreign exchange market is volatile by nature. The practice of trading it by way of margin increases that volatility exponentially. We are talking about a very 'fast market' which is naturally inconsistent. In order to make a successful trade, a trader has to take into account technical and fundamental data and make an informed decision based on his perception of market sentiment and market expectation. Timing a trade correctly is probably the most important variable in trading successfully. Invariably there will be times when a traders' timing will be off. So don't expect to generate returns on every trade.

Let's see what a trader needs to do in order to put the best chances for profitable trades on his side:

Trade with only money you can afford to lose
Trading forex markets is highly speculative and can result in huge losses. It is also exciting, exhilarating and can become addictive. The more you are 'involved with your money' the harder it is to make a clear-headed call. Money you have earned is precious, so trade only with money you can afford to loose.

Know the state of the market
How is the market doing? Is it trending upwards, downwards, or is it in a trading range. Is the trend strong or weak, does it look like a new trend that's forming or did it begin long ago. Getting a clear picture of the market situation is laying the necessary groundwork for a successful trade.

Find out what time frame you're trading on
Many traders get into the market without thinking when they would like to get out. When trading, one must extrapolate in his mind's eye the movement that are expected to happen. Within this extrapolation, resides a price evolution during a certain period of time. This creates the idea of exit price. The importance of this is to put your trade in perspective and although it is clearly impossible to know exactly when you will exit the market, it is important to define from the outset if you'll be 'scalping' -- trying to get a few points off the market -- trading intra-day, or going longer term. This will also determine what chart period you're considering. If you trade several times a day, there's no point basing your technical analysis on a daily graph. You'll probably want to analyze 30 minute or hour graphs. Also it is important to know the various time periods when different financial centers enter and exit the market as this creates more or less volatility and liquidity and can influence market movements.

Timing your trade
You can be right about a potential market movement but be too early or too late as you enter the trade. Timing considerations are twofold; an expected market figure like CPI, retail sales or a Federal Reserve decision can consolidate a movement that's already underway. Timing your move means knowing what's expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move could occur.

When in doubt, stay out
If you're unsure about a trade and see yourself hesitating, stay on the sidelines.

Trade logical transaction sizes
Margin trading allows the forex trader a very large amount of leverage. Trading at full margin capacity can yield very large profits or losses on an account. It is usually recommended that you scale your trades so that you may re-enter the market or make transactions on other currencies. In short, don't trade amounts that can potentially wipe you out and don't put all your eggs in one basket.

Gauge the market sentiment
Market sentiment is what most of the market is perceived to be feeling about the market and thus what it is doing or going to do. This is basically about trend. You may have heard the term 'the trend is your friend’. This means that if you're in the right direction with a strong trend you will make successful trades. This is obviously very simplistic. A trend is capable of reversing at any time. Technical and fundamental data can indicate if the trend has begun long ago and if it is strong or weak.

Market expectation
Market expectation relates to what most people are expecting as far as upcoming news is concerned. If people are expecting an interest rate to rise and it does, then there usually will not be much of a movement because the information will already have been 'discounted' by the market. Conversely, if the adverse happens, markets will usually react violently.

In conclusion
Before starting, make yourself familiar with various trading platforms and develop several trading strategies. Currency trading or Forex trading is not for everyone and should be undertaken after serious consideration.

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