What Is Forex?

Introduction to Forex.

Foreign exchange (aka forex) is an off-exchange retail foreign currency market where participants purchase currency in exchange for another (at the current exchange rate).

Forex and You

Forex can affect the lives of everyone, regardless if you don't travel overseas or don't invest in currency. Today's world of commerce is such an international one that happenings on the other side of the world can ripple out to all nations.
China is a perfect example of this. The government in China regulates the exchange rate of their currency, and many believe the currency to be undervalued. A undervalued currency means Chinese made goods can be purchased for "less" on the international market. Were the Chinese government to allow the market to dictate the exchange rate the effects would definitely be felt across the globe, even for Americans who've never left America.
The reasons why an individual - or institution - would want to exchange money range to a myriad of different reasons, but the 3 main demographics include large corporations and institutions, speculators (investors) and tourists.
Tourists - A tourist traveling from the United States to England, for example, will need the local currency (Great British Pounds), as common shops, taxi cabs, etc. will most likely not accept US Dollars. Typically the airport, hotels and other tourist destinations will have services to exchange just about any currency into the local tender.
Large Corporations and Institutions - A large portion the global foreign exchange market consists of corporations and institutions, who often exchange currency for non-investment purposes: the need to meet payroll in other countries, to pay for services from a foreign factory, mergers and acquisitions, etc.
Investors - Investors are attracted to the forex market because of its possibilities and advantages (which will be discussed in more detail in the 3rd email of this series). For example, investors enjoy the added liquidity and volume forex has to offer.
Unlike other financial markets, the Forex market operates 24 hours a day, 5.5 days a week (6:00 PM EST on Sunday until 4:00 PM EST on Friday). Through an electronic network of banks, corporations and individual traders exchange currencies, Forex trading begins every day in Sydney, moves to Tokyo, followed by Europe and finally the Americas - making the market available 24 hours during the week.

Forex Market Hours

Unlike other financial markets, the Forex market operates 24 hours a day, 5.5 days a week (6:00 PM ET on Sunday until 4:00 PM ET on Friday). It is conducted through an electronic network of banks, corporations and individual traders exchanging currencies. For retail traders Forex is primarily used as a means for speculative investing and actual physical delivery of currencies is almost never intended. Forex trading begins every day in Sydney, moves to Tokyo, followed by Europe and finally the Americas.

How to Choose a Forex Broker.

With so many different choices out there, how does a Forex "newbie" pick a broker? Chances are most new traders have no idea on where to start - and that's okay!  We're here to help!  We have put together a simple three step process to help you find a broker that YOU think will best suit YOUR needs.  You might be thinking now, "Three steps? That's it?"  Yesssiirrrr!
In the first step, you will go through some of the main questions you need ask yourself when reviewing different brokers.  Then you will take a look at different brokers and their available features. We have put together a comparison guide by taking some of the most frequently asked questions across the internet, and surveyed some of the most frequently asked about brokers out there, so that you don't have to. 
With this guide, you can narrow your choices down and take the final step of talking with different brokers and demo trading on different platforms. Simple, right? Let's begin...

Step 1: Do your research

Before comparing brokers, do you know what to look for? No? Well, here are a few of the main questions you should ask yourself:

1. Is this broker registered with any regulating authorities? Check to see if your broker of choice is registered with the National Futures Association (NFA) or Commodity Futures Trading Commission (CFTC) if they're based in the US. If the broker is based in the United Kingdom, check with the Financial Service Authority (FSA). If the broker isn't registered with any of these or any other recognized regulating firm, then you may want to think twice before signing up with them.
2. Dealing Desk or Non-Dealing Desk broker? Does the broker offer fixed or non-fixed spreads? How wide are the spreads? These questions are more significant to those traders who like to take quick profits on a few pips. Large and/or variable spreads can cut into the profits of this type of trading strategy.
3. How much or how little leverage will a broker give you?  We highly recommend you review "Leverage The Killer"before deciding on how much leverage would be suitable for your trading style. The phrase, "Less is More," can save every newbie
4. Of course, you’re not going to start trading with real money right away, right? Well, when you do having a winning strategy and you are ready to trade live; knowing how much risk capital you have to start with makes a big difference. If you have $2000 or less to start with then you probably want to start trading "micro" lots. Not every broker has this feature.
5. Does this broker credit or debit daily rollover interest? Some brokers either do both, deduct interest, or neither.  This information is important to traders who hold positions overnight.
6. Does this broker over premium services such as charting, news feeds, and market commentary? How important are premium services to my trading?

Step 2: Compare brokers

Let's not beat around the bush.

Step 3: Open demo accounts and ask questions. 

Pick at least two brokers that fits most of your criteria and open up demo accounts. Trade in different market environments. Learn all the different features of each trading platform. If you have questions, don't be afraid to ask. Many brokers have excellent customer service support and would be happy to answer your questions.
 
Most demo trading platforms are very similar to their live counterparts, but not exactly the same. There may be a difference in speed of execution, slippage, and platform reliability (most of the time live accounts are more reliable than demo accounts). When you do have your strategy down and you are ready to move to a live account, start off small, test the waters, and see if this particular broker will suit your trading needs.

Margin Defined

So what about the term “margin”? Excellent question my bright padawan learner.
Let’s go back to the earlier example:
“For example, in forex, you can control $100,000 with a $1,000 deposit. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000.”
The $1,000 deposit is “margin” you had to give in order to use leverage.
Margin is the amount of money needed as a “good faith deposit” to open a position with your broker. It is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one “super margin deposit” to be able to place trades with the interbanks.
Margin is usually expressed as a percentage of the full amount of the position.  For example, most forex brokers say they require 2%, 1%, .5% or .25% margin.
Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.
If your broker requires 2% margin, you have a leverage of 50:1. Here are the other popular leverage “flavors” most brokers offer:

Margin Required	Maximum Leverage
5%	20:1
3%	33:1
2%	50:1
1%	100:1
.5%	200:1
.25%	400:1

Aside from “margin required”, you will probably see other “margin” terms in your trading platform. There is much confusion about what these different “margins” mean so I will try my best to define each term:
Margin required: This is an easy one because I just talked about. It is the amount of money your brokers requires from you to open a position. It is expressed in percentages.
Account margin: This is just another phrase for your trading bankroll. It’s the total amount of money you have in your trading account.
Used margin: The amount of money that your broker has “locked up” to keep your current positions open. While this money is still yours, you can’t touch it until your broker gives it back to you either when you close your current positions or when you receive a margin call.
Usable margin: This is the money in your account that is available to open new positions.
Margin call: If the equity in the account drops below your used margin, a margin call will occur and some or all open positions will be closed by the dealing desk at the market price.

Margin Call Example.

Assume you are a successful retired British spy who now spends his time trading currencies. You open a mini account and deposit $10,000. When you first login, you will see the 10,000 in the "Equity" column of your "Account Information" window. 

Usable Margin

You will also see that the "UsedMrg" ('Used Margin') is "$0.00", and that the "UsblMrg" ('Usable Margin') is 10,000, as pictured below:

Your Usable Margin will always be equal to Equity less Used Margin.
Usable Margin = Equity – Used Margin
Therefore it is the Equity, NOT the Balance that is used to determine Usable Margin. Your Equity will also determine if and when a Margin Call is reached.
As long as your Equity is greater than your Used Margin, you will not have Margin Call.
            ( Equity > Used Margin ) = NO MARGIN CALL
As soon as your Equity equals or falls below your Used Margin, you will receive a margin call.
            ( Equity =< Used Margin ) = MARGIN CALL, go back to demo trading
Let’s assume your margin requirement is 1%. You buy 1 lot of EUR/USD.
Your Equity remains $10,000. Used Margin is now $100, because the margin required in a mini account is $100 per lot. Usable Margin is now $9,900.

If you were to close out that 1 lot of EUR/USD (by selling it back) at the same price at which you bought it, your Used Margin would go back to $0.00 and your Usable Margin would go back to $10,000. Your Equity would remain unchanged at 10,000.
But instead of closing the 1 lot, you, the adrenalin junkie chopsocky retired spy that you are, get extremely confident and buy 79 more lots of EUR/USD for a total of 80 lots of EUR/USD. You will still have the same Equity, but your Used Margin will be $8,000 (80 lots at $100 margin per lot). And your Usable Margin will now only be $2,000, as shown below:

With this insanely risky position on, you will make a ridiculously large profit if EUR/USD rises.  But this example does not end with such a fairy tale. 

Let me paint a horrific picture of a Margin Call which occurs when EUR/USD falls.
The EUR/USD starts to fall. You are long 80 lots, so you will see your Equity fall along with it. Your Used Margin will remain at $8,000. Once your equity drops below $8,000, you will have a Margin Call. This means that some or all of your 80 lot position will immediately be closed at the current market price.
Assuming you bought all 80 lots at the same price, a Margin Call will trigger if your trade moves 25 pips against you.
25 PIPS!
Humbug! The EUR/USD pair can move that much in its sleep!
How did I come up with 25 pips? Well each pip in a mini account is worth $1 and you have a position open consisting of 80 freakin’ lots. So…
$1/pip X 80 lots = $80/pip
If EUR/USD goes up 1 pip, your equity increases by $80.
If EUR/USD goes down 1 pip, your equity decreases by $80.
$2,000 Usable Margin divided by $80/pip = 25 pips
Let’s say you bought 80 lots of EUR/USD at $1.2000. This is how your account will look if it EUR/USD drops to $1.1975 or -25 pips.

As you can see, your Usable Margin is now at $0.00 and you will receive a MARGIN CALL!
Of course, you’re a veteran international spy, you’ve faced much bigger calamities. You’ve got ice in your veins and your heart rate is still 55 bpm.
After the margin call this is how your account will look:

The EUR/USD moves 25 PIPS, or less than .22% ((1.2000 – 1.1975) / 1.2000) X 100% and you LOSE $2,000!
You blew 20% of your trading account! (($2,000 loss / $10,000 balance)) X 100%
In reality, it’s normal for EUR/USD to move 25 pips in a couple seconds during a major economic data release.

Oh I almost forget…I didn’t even factor in the SPREAD!

To simplify the example, I didn’t even factor in the spread, but I will now to make this example super realistic.
Let’s say the spread for EUR/USD is 3 pips. This means that EUR/USD really only has to move 22 pips, NOT 25 pips before a margin call.
Imagine losing $2,000 in 5 seconds?!
This is what happened to our popular British spy all because he didn’t understand the mechanics of margin and how to use leverage.
The sad fact is….most new traders don’t even open a mini account with $10,000. Because our spy friend had at least $10,000, he was at least able to weather 25 pips before his margin call.
If he only started off with $9,000, he could only weather a 10 pip drop (including spread) before receiving a margin call. 10 pips!

Leverage the Killer

Most professional traders and money managers trade one standard lot for every $50,000 in their account.
If they traded a mini account, this means they trade one mini lot for every $5,000 in their account.  
Let that sink into your head for a couple seconds.
If pros trade like this, why do less experienced traders think they can succeed by trading 100K standard lots with a $2,000 account or 10K mini lots with $250?

No matter what the forex brokers tell you, don’t ever open a “standard account” with just $2,000 or a “mini account” with $250. The number one reason new traders fail is not because they suck, but because they are undercapitalized from the start and don’t understand how leverage really works.

Don’t set yourself up to fail.

We recommend that you have at least have $100,000 of trading capital before opening a “standard account”, $10,000 for a “mini account”, or $1,000 for a “micro account”.

So if you only have $60,000, open a “mini account. If you only have $8,000, open a “micro” account. If you only have $250, open a “demo account” and stick with it until you come up with the additional $750, then open a “micro account”.

If you don’t remember anything else in this lesson, I plead that you at least remember what you just read above.
Okay, please re-read the previous paragraph and ingrain it in your memory. Just because brokers allow you to open an account with only $250 doesn’t mean you should and I’m going to explain why. 

I believe most new traders who open a forex trading account with the bare minimum deposit do so because they don’t completely understand what the terms “Leverage” and “Margin” really are and how it affects their trading.
It’s crucial that you’re fully aware and free of ignorance of the significance of trading with leverage. If you don’t have rock solid understanding of leverage and margin, I guarantee that you will blow your trading account. 

If you don’t remember anything else in this lesson, I plead that you at least remember what you just read above.  

Leverage Defined.

The textbook definition of “leverage” is having the ability to control a large amount of money using none or very little of your own money and borrowing the rest.
For example, in forex, you can control $100,000 with a $1,000 deposit. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000. 
Let’s say the $100,000 investment rises in value to $101,000 or $1,000. If you had to come up with the entire $100,000 capital yourself, your return would be a puny 1% ($1,000 gain / $100,000 initial investment). This is also called 1:1 leverage. Of course, I think 1:1 leverage is a misnomer because if you have to come up with the entire amount you’re trying to control, where is the leverage in that?
Fortunately, you’re not leveraged 1:1, you’re leveraged 100:1. You only had to come up with $1,000 of your money, so your return is a groovy 100% ($1,000 gain / $1,000 initial investment). 

Now I want you to do a quick exercise. Calculate what your return would be if you lost $1,000.
If you calculated it the same way I did, which is also called the correct way, you would have ended up with a -1% return using 1:1 leverage and a WTF! -100% return using 100:1 leverage.
You’ve probably heard the good ol’ clichés like “Leverage is a double-edge sword.” or “Leverage is a two-way street.” Well….as you can see, these clichés weren’t lying.

What Should You Know Before You Get On Board.

Lately, currencies have been on a rollercoaster ride with record breaking highs and lows. The world of foreign exchange is dominating news headlines; but what does it mean, and more importantly, what do you need to know before you get on board?

First of all, it's important that you understand that trading the Foreign Exchange market involves a high degree of risk, including the risk of losing money. Any investment in foreign exchange should involve only risk capital and you should never trade with money that you cannot afford to lose.

8 Most Important Steps to Successful Trading.

 8 Most Important Steps to Successful Trading.

 After months of practice and learning, every struggling novice trader begins to wonder whether the decision to enter forex trading was actually a big mistake. Why do other traders make money and I don’t? Do these successful individuals possess any special qualities? Can I improve myself in order to finally start making money?
In order to become profitable in forex, you need to not only learn and practice, but work hard in improving yourself. Below are the major characteristics needed in order to become successful.
 If you already possess the essential traits – good for you! Just keep practicing and soon you will see the cash flow. If you don’t have the necessary traits yet – don’t give up. Start working on yourself. It is possible to craft yourself into a trader!
So, here goes:

1.     Don’t Copy

Copying others is absolutely useless in forex. Every trader is unique and his/her strategies fit their personality and goals. You cannot rely on anyone else but yourself.

2.     Be Disciplined

Stick to the plan, even when your self-esteem is over the top. Use your experience and knowledge of the market to make the right decisions, instead of irrational i-can-make-a-million-right-now conclusions, without skipping any important steps in your trading plan.

3.     Accept Losses with Grace

Losses are not necessary a bad thing – write down the unfortunate experience in your trading journal, analyze why this happened and voila! You have received one of the valuable lessons by learning from your own mistakes. Practice makes perfect – so don’t freak out over the losses. Instead, learn from it and move on.

The main difference between a successful trader and a novice beginner is in accepting the loss. The sooner you learn to lose, the faster you earn money!

4.     Be Patient and Reasonable

Know exactly why and when to enter a trade. And here is a great tip – say all those reasons out loud. It is a great way to give a last glance before you make a final click.

Don’t expect the profitable opportunities to pop up all day long. Sometimes, it is wise to give it a break and start again the next day with a clear head.  Don’t worry about missing out either, because forex market is always on the move. Not catching the big wave doesn’t mean you will be left out without any profits for ages!

5.     Control Your Money

Forex is not just about making more and more money, but also keeping what you have already made! You need to have very strict money management rules in order to keep your losses at minimum:

·         Never trade what you cannot lose

·         Determine your target gains and losses before opening a position

·         Use stop/loss orders to minimize the risks

6.     Keep It Simple

You don’t need to use all available forex indicators and create a one of a kind Michelangelo-like-masterpiece trading strategy. Keep trading ideas to the minimum – know when to get in and out of the trades and stay away from sentences such as “Let’s stay a bit longer and see what happens”!

·         Try trading daily during the same hours in order to get full grasp of currency behavior, liquidity and volatility changes.

·         Don’t trade on Sundays, holidays and opening/closing of the specific market.

·         Stay informed – read the news, follow the economic calendar, keep your eyes on unemployment rates, decisions on interest rates, gross domestic products, industrial production price, index consumptions, retail sales etc.

·         Follow the trend – don’t try to find something that there isn’t, just follow the rend and identify the point of inversion.

7.     Develop Strategies

Use free demo accounts to develop your own strategy and a good trading plan. List out several possibilities (plan a, plan b, plan c) – and always have a clear instructions from getting out of troubles. The key to success in forex is to know how to behave in different situations, instead of trying hard to predict what market will bring us today.

8.     Control Yourself!

Here is the tough part – the psychological issues related to trading. It is important to stay as cold-blooded as possible by controlling your emotions.

Most importantly, don’t blame the market – blame only yourself! Are your losses still greater than profits? Stop trading right now and start analyzing your strategy. There is a flow somewhere and it is up to you to fix it.

Forex Is An Art.

When you say trading, people will say trading is an art. Look at all the books that has been published on the subject. They will say the art of trading forex.

In that sense, we must take forex as an art and not a science. I know, some people may not agree with me and all the post that is in this blog. I don't blame them coz I was actually in the same place as they were when I started trading. Trying to find the answer to forex using every logical explanation.

This is the answer that you have been looking for. I am going to give it to you straight away. Let see if your mind can accept it.

Forex is not a science. There is not a single mathematical equation that can explain it. Do not forecast, do not predict, do not anticipate. All you need to do to make profit is to follow the market. If the price is going up, you buy. If the price is going down, u sell. You may not win all the time but if you follow the market, in the end you will be in profit. Make profit and build up your capital up to a point where a few winning trades per month will bring huge profit.

Can you accept it? Can you mind admit it? Is your logical mind challenged? Do you feel helpless? Welcome to the real world :)

Top 10 Forex Trading Tips.

                                                                         

Investing in foreign exchange markets has                traditionally been the domain of large institutions and corporates to reduce currency risk.

However, the FX markets have evolved significantly and increasingly are being seen as a source of returns for investors. Institutional investors such as hedge funds have played an important role in this development but as with most markets, retail investors are catching up and looking at FX as an interesting asset class with strong diversification and return-generating opportunities.

1. 
   
   

   Practise before you start trading with real money

   Could you imagine an athlete going to the Olympic Games without preparation and training? Make sure you have practised your trading on a demo forex trading platform and get comfortable with the platform and your trading style before committing real money.
2. 
   
   

   Know what moves currency markets

   Like any asset class, there are a number of factors that drive currency performance. A country’s macroeconomic situation can have a major influence – economic data releases, policy decisions and political events can change an economist’s outlook on the country, and therefore the currency. There are also technical factors such as interest rates, equity markets and international trade which may have an impact. Spend time getting to know these.
3. 
   
   

   Understand the strategies

   Yes there is a method to the madness. As a trader you need to be aware of three crucial forex trading strategies which are often used by currency traders; the carry, momentum, and value trade. Momentum tracks the direction of currency markets; the carry strategy sees investors selling currencies with low interest rates and buying those with high rates; and the valuation strategy takes a position based on the investor’s view of a currency’s value. However, the strategies that you use are up to you.
4. 
   
   

   Manage risk

   Like with any investment decision, you must decide what risk you’re willing to accept. Ask yourself, “how much am I prepared to lose on this position?” If you don’t have a convincing or comfortable answer then you should rethink the trade. Do not risk more than you can afford to lose. Think about how you can mitigate your downside risk; make use of FX trading strategies such as stop losses or limit orders.
5. 
   
   

   Stick to what you know

   There are literally hundreds of currency pairs that can be traded in the currency markets, each of which have their own characteristics and considerations to understand and analyse. If you’re participating in the market on a part time and non professional basis, it is probably better to concentrate on just a few pairs and commit to thorough and robust research on those, rather than superficial research on the many. Some key things to consider when analysing a currency pair are its liquidity, transaction costs (the spread) and its volatility. As a general rule, major currencies usually have better liquidity, tighter spreads and lower volatility, versus emerging market currencies which have poor liquidity, wide spreads and volatile movements.
6. 
   
   

   Plan your trade, trade your plan

   It’s one thing to have a plan, it’s quite another to execute it. It is important in FX currency trading to not get caught up in the moment – the markets are fast moving and in the short term can be unpredictable.
7. 
   
   

   Research, research, research

   It’s important to stay up to date. All currencies move quickly and checking the price once a week is not going to help you make strong long term returns. It is helpful to use an online provider that gives you up to the minute data and statistics. Traders use this data to constantly assess their trading positions.
8. 
   
   

   Keep your emotions in check

   Like many important decisions, it is vital to keep emotion out of any trading decision you make. If you’re upset about missing out on an opportunity and want to trade yourself better, or want to go ‘off-piste’ to make up for a loss earlier in the day – reconsider, because you’ve got the warning signs of someone about to make a rash and irrational decision. If you do feel yourself getting emotionally involved in a particular trade, take a deep breath, review your strategy, and establish how such a decision will affect your overall approach before going anywhere near the ‘execute’ button.
9. 
   
   

   Don’t expect to win on every trade

   That may not sound like much of a sales pitch, but even the most successful of traders don’t win on every trade. What they do have is a robust plan and long-term strategy which carefully considers the risks. So don’t necessarily be disheartened if a trade doesn’t go our way; review why it went wrong and see if there is anything to learn from the experience.
10. 
    
    

    Consider diversifying your portfolio

    Foreign exchange is only one of the many asset classes you should be considering as part of a balanced investment portfolio. FX trading is not suitable for every investor, so if you are committing a substantial portion of your financial resources to FX trading be sure you are fully aware of the risks and rewards of doing so, because it’s not recommended. The same applies for currency trading itself; spread your risk by not placing all your faith in a single trade because diversification is key; no matter what asset class you’re investing with.