Yuwie.com | ^*Iyan17*^'s Blog

Fun Investment

WHY TRADE FOREX ?

Forex as a career
Become a professional trader
Some people like to take full control of their lives and wealth.On forex you call the shots,decide when to buy or sell currencies, determine risks. So if you tired of working for someone else, you should consider a career as a professional trader.

Forex as an investment
Take advantage of long-term trends

Global currencies not only fluctuate every minute, they also increase or decline in value vis-a-vis one another over long periods of time. You can take advantage of this investment opportunity. For instance, if you expect that the dollar rate will continue its decline versus the Euro in the next few years, you can invest in Euros.

Forex as a hobby
Feel the rush of the markets

Some people simply enjoy the process of trading. You don’t have to invest much to trade on Forex. Unlike with many other kinds of trading, you can start on Forex with as little as $10, and it can become a really enjoyable hobby.

Forex as risk-management
Manage international business risks

If your business is international chances are that some of your transactions and obligations are in different currencies. That means that your business is exposed to a wide variety of risks associated with constant changes in currency rates. You can control these risks by opening positions on the Forex market, using a logic similar to that of agriculture companies selling their goods in advance on the futures market.

What is forex?
Forex is the foreign exchange marketplace where currencies from different countries are valued and exchanged. Most people only know about forex to the extent that they have changed money going from one country to another. When they did so, they unwittingly played a role in the world’s biggest marketplace. Forex trades almost $2 trillion per day, a total that exceeds all of the world’s biggest – and better known – markets.
Since currencies are valued differently, there is a market in place to set those values. Where a market exists speculation inevitably follows. In this case, the market is hyper-active. Banks sending deposits around the world, corporations hedging their exposure to currency risk in different countries, government banks forwarding national economic goals through monetary policy, and massive investment funds playing the role of speculator. Not long ago, that was the extent of the market. It was the domain of the professional trader or banker.
The word “market” usually invokes the idea of a central market place like the New York or London exchanges. This is not the case in forex. Instead, forex functions through what is known as the “interbank” market. Interbank is a fancy way of saying that banks trade with each other, absent a central market place. This is one major reason why volume data is not available for forex. It’s also the reason why retail investors and smaller traders were left on the sideline for so long.
In the 90’s, a series of events unfolded that made forex available to retail investors. Deregulation led many companies to form pools of liquidity where retail investors could take advantage of the huge speculative opportunity in forex. These dealers offered high leverage, low minimums, and a new way to trade – 24/7.

What are pairs and pips?
Each currency exists in the marketplace not on its own, but as a “cross” between itself and another currency. This is practical, since when you travel to Europe you want to exchange your money for Euros. If you have US Dollars, you will be exchanging money at the rate set by EURUSD. EURUSD is a “pair”. It also happens to be the most popular pair. Most currencies are paired with EUR and USD, and to other currencies to a lesser extent. The “four majors” are EURUSD (Euro/Dollar), USDJPY (Dollar/Yen), GBPUSD (Pound/Dollar), and USDCHF (Dollar/Franc).
The bid-ask spread is usually lowest for the four majors, since their volume is the highest. With high volume the dealer is usually assured of having ample liquidity to meet your trading needs, so they charge you less through the spread. For more obscure, less traded pairs, the spread will be more, since dealers assume more risk in completing those transactions.
The spread itself is made up of pips. A pip is simply an incremental unit in forex. In stocks, you call them ticks or points. That makes sense because usually all stocks are quoted in the same currency. In forex, each currency may have a different incremental unit. For example, a quote in EURUSD might be 1.3240, versus a quote in USDJPY at 107.87. What is the incremental unit? There is no common unit, so one was created, and it was named a pip. A pip is always worth $10 if the pair ends in USD. If not, you will need to refer to a pip calculator to get the value, since these per pip values can vary, even within the same currency.

How do you trade forex?
There are two major methods for trading forex: fundamental and technical.
Fundamental analysis relies upon a broad and near-expert understanding of multi-national macroeconomic statistics and events.
Fundamental traders believe that the value of a pair is determined by the underlying health of the two nations involved in the pair. A high value for GBPUSD, for example, would suggest a better economic outlook in Britain vis-à-vis the United States. Global events like news, catastrophes, politics or economic shocks all play a role in determining price.
Technical analysis is based on the mathematical analysis of price, and of many variables which all derive from price. Technical traders believe that technical indicators include fundamental analysis and also provide repeatable, tradable patterns. Technical traders use charts to determine support and resistance, draw trend lines, or analyze measures like moving averages, etc.
Whichever camp you belong to determines your trading approach. A fundamental trader may take the Warren Buffet approach and buy-and-hold a pair, expecting long term returns. A technical trader may play long term as well, but usually day trades. Some fundamental traders trade on news, which may just be certain days of the month.

What is leverage?
Since dealers have ultimate control over accounts and trades, they are willing to loan money to the trader. That’s called margin – basically a loan from the dealer to the trader, but based on the trader’s equity. Normally if the trader wants to trade EURUSD he would need $100K, but not if the dealer offers margin. Margin is another word for leverage, with a little difference in concept.
Some dealers will allow you to trade a full standard contract with just $500 in margin available. That means the user has to have at least $500 (or really $500 spread) in their account to trade. If at any time their account balance equals or drops below their margin requirement, the dealer will liquidate all of their positions. That’s called a Margin Call. So if you traded 5 contracts with $4,000 in your account, you would be using $2500 in margin. If the trade went against you $1500, you would be taken out.
When you traded the one contract with $500 in margin, you controlled $100,000. That’s leverage. It’s 200:1 in this case (leverage = $100,000 divided by $ per contract as a % of total equity). In this example, you would only be employing 200:1 leverage if your account equity was $500. Most dealers have scaling margin which allows smaller accounts to use something like 200:1 and bigger accounts to use 50:1, or 10:1. If you had $20K in your account and played 40 contracts, that would be 200:1 leverage. $100K with 10 contracts is 10:1.
Leverage is one of the biggest reasons people trade forex, but it’s also one of the biggest reasons people lose money. Be careful to manage your leverage position when trading, especially when starting out.

What tools do I need when starting out?
First, common sense and good judgment! Dealers make it very easy for new traders to come in and make money, but many of those same features make it possible to lose money very quickly. Use the demo system to start, and then be sure to begin with one mini contract (controls $10,000, not $100,000 like the standard contract).
Beyond that, you will need a trading platform, charts, and/or a news service. Joining a trading community with forums is also a great way to learn.
Most dealers will provide a trading platform. Some offer an automated platform on their own, and others offer an automated platform through a third party. FX Engines offers its automated trading platform with many features for beginning traders, and routes all trades through FXCM, the world’s largest dealer. Other automated trading platforms may be different.
Charts are sometimes offered through the trading platform, as is news. If not, check one of the many forex forums online to get a sense for what people think are good chart and news subscr i ptions, then give those a try.

What’s the most important element in trading forex?
Discipline. That’s easy to say and much easier to practice in other markets. Forex makes it tougher because it’s always open, and big moves are always happening. It’s one of the reasons why an automated system is so valuable in forex.
Even if you forego automation, you need to develop a scr i pt for trading that you can always follow. Consistency is the key, and your ability to stay consistent will surely be challenged.
Learn all you can, build a system, and practice trading before you risk a dollar. The early losses that come from a rush to trading can damage confidence, and that can be difficult to repair. The markets are going nowhere – if you take the time to learn and then consistently apply your knowledge to this huge market your rewards will surely follow.

THANKS REGARDS........

Posted: 6/7/2008 at 09:35

Read 111 times | 6 comments | Leave Comment