Introduction to Forex

Introduction to Forex

Introduction to Forex Trading

 

What is Forex Trading?

When speaking of foreign exchange trading, currencies are organised into pairs and then categorised for investment. The USD is the world’s dominant reserve currency and is used as a general measure for the value of many others. Pairs are classed as majors when leading currencies are paired with the USD, as minors when two leading currencies are partnered (no USD), and as exotic or cross paired when the USD is matched with an emerging economy.

Forex trading involves taking a position in a specific direction with a currency pair, based on a degree of technical and/or fundamental analysis. Upon the time of position closure, the difference between the opening and closing levels represent either profit or loss for the trader.

Strategies for Profit

An abundance of strategies and other factors can be applied to reap profit from forex trading. Even being on the wrong side of the market is not necessarily a bad thing as money management techniques can be applied to aid recovery from a losing position.

The primary aspect to consider is to always have a stop loss in place for any position that is taken. This acts as the absolute invalidation level, or the boundary for where the reasons for going long or short (buying or selling) are no longer valid.

Secondly, a trader needs to pay attention to volume or trading size. This should always correlate with the size of the trading account. For example; should you have a $5,000 trading account, it makes no sense to trade upwards of ten lots per trade. At such a rate, even the smallest move by the market against the open position, will result in the depletion of your account. Using one or two percent of your account for each trade is a popular method and a great money management tool for giving the account a chance to grow.

Fees

I think its best at this point to clarify that your account will bear some expenses.

There is a swap pertaining to every currency pair. Swaps represent the interest rate differential between the two currencies, and can be either negative or positive. At the end of each trading day, positions are rolled-over and it is at this point that the swap is deducted or added to the account balance. Of course, the bigger the trading size, the larger the outcome of the swap is going to be. Swaps are sensitive to market volatility and rates may increase for positions held open over the weekend.

Commissions are also relative to trading position size. These payments are made by the time a position is initiated and are higher if the position taken was big. Depending on your broker’s account options, you may experience this commission as either included in the spread (the difference between the bid and ask price of a pair), or as charged per trading lot.

How Does this Affect Your Broker Selection?

All of the above points represent the principal factors that distinguish brokers from one another. Not all brokers have the same commission rules and rates – this really is dependent on the company’s negotiations with market makers and liquidity providers. As such, well-established brokers are far more likely to have more accommodating quotes and products.

When on the search for a forex broker, you’ll want to try and pin down one that is regulated by a financial authority. If an alternative is favourable, you’ll want to conduct your research thoroughly to determine if they manage segregated client accounts and carry an excellent reputation for transparent conduct. Such brokers will enable you to keep your focus on trading without worrying about your broker’s solvency / stability.