Forex Trading for Beginners - Page 1 of 3     Page 2   Page 3

As an enthusiastic and increasingly successful forex trader, I would like to give you a basic introduction to forex trading, a popular pursuit for anyone including retirees or people living in foreign countries. Forex trading can be done without your own computer, such as from an internet cafe, airport lounge or hotel, because it can be 'web-based'. That means no need to download special software, and it can now done even from a mobile phone.

Forex trading does not mean you actually pay for foreign currency; you merely take a temporary 'option' to buy or sell it, often the same or next day, but trades can remain open almost indefinitely.

For overseas residents of certain countries, there can be tax benefits and other advantages. A non-US resident bank account is a useful facility, especially if there's no cost involved in opening or operating it.

The aim of these pages is to give you the basics of forex trading so there is no need for you to jump in head first and be overwhelmed with sales hype and false promises from many sources, some good, some not, and some merely trying to sell you knowledge and facilities that are sometimes available for free. There are plenty of forex resources available on the internet in the form of web pages and downloadable books like "Bird Watching in Lion Country" which is the one I highly recommend to traders both old and new. Read more on the next page. Many of them (including well over 150 of our site visitors and members) have benefited from "BWILC" as it has saved them much more than the purchase price!

Forex (currency trading) defined
The abbreviations come from Foreign exchange (simultaneously exchanging one major currency for another). Most transactions are made between US dollars and a second currency. Transactions are made using online trading systems made available by banks and forex brokers. Rates of exchange (the value of one currency rated against another) vary constantly by small amounts (called pips). A forex trader can choose to buy or sell a pair in order to profit from a relatively small change in the rate.

The change in forex rates seen in the short term, such as a day, is often very small. It might be only 0.0001 percent. However, profit is still achievable; a trader who buys standard 'lot' of 100,000 units of a base currency e.g. the GBP, with a unit price of $1.5159, would be sure to make more than $100 profit if the value rose by just 0.001 percent during the day. If he held this level of trade for a month, it would be some $3,000 or $36,000 per year from capital of $100,000 dollars, a 36% annual return, unlikely elsewhere in today's markets.

This explains the term forex PIP: Percentage In Point i.e. the percentage of a single percentage point (1%) that a currency changes within a day. The pip is the smallest change in price of a currency used in the forex market.

Forex Trading Objectives
The objective of forex traders is to profit from buying then re-selling currencies of different countries. The forex market trades in currency pairs like the British Pound and the US Dollar (shown as GBP/USD) or the US Dollar and the Japanese Yen (USD/JPY). There are several major pairs that traders can choose from, as well as other currencies, market indices and precious metals.
A currency is purchased at the current (spot) market price which can be re-sold at any time, at a higher or lower price. The difference in value between the buying and selling price is measured in pips (one pip equals around $10). This then becomes the profit (or loss) on that trade, and the value is credited or debited to your account with the forex broker who holds your trading account.

The main participants and when they trade
Although virtually anybody can trade, international currency values are influenced (but not controlled) by the world’s largest commercial banks and finance houses, and governments who make sometimes vast transactions every day. With a daily turnover of 2 trillion US Dollars, (100 times bigger than the stock market) the forex market is by far the largest financial market in the world, making it impossible for an individual or small group of traders to 'corner' or control it for any period of time. Unlike stock and commodities markets, the forex market is open for 24 hours per day for more than five days a week. Most trades, especially larger ones, are conducted during business hours in the main financial markets of New York, London, Zurich and Tokyo. Although they operate in different time zones, there are periods when two or more exchanges are open simultaneously, and these are the most active 'time slots'.

Unlike the world's stock markets and commodities exchanges which are open fixed hours, the forex market, apart from a break between Friday and Sunday afternoons, is 'open for business' 24 hours a day somewhere. Forex trading follows the sun's daily path, beginning in the Asia Pacific financial centres of New Zealand, Australia, China and Japan, then SE Asia and India on to the Middle East then Russia, Europe and the United Kingdom and finally across the Atlantic Ocean to North America, by which time Asia is already trading on the following day. Forex is truly a continuous global market.

However, it's important to know when the major forex markets are at their most active, as this is when you are likely to have the best chance of success in forex trading. You can download a free 37 page "Cheat Sheet" with free Retire-Asia site membership. There is a lot of other useful information on several different topics too on Retire-Asia members' download page, but use the drop down box to join the Trading Group. Reload this page if you missed it.

Forex trades take place when dealers or brokers can find 'matching' buyers and sellers on the international market, but in practice smaller trades are carried 'in house' by brokers who almost always have customers trading in both directions. Forex traders can be based anywhere there is access to the internet – even lazing on a beach in the tropics, trading from a laptop computer with a wireless connection – and even from mobile phones! Many people including retirees all around the world have found forex trading an interesting, mentally stimulating diversion and, with some experience, a significant extra income source.

How is forex trading carried out?
Foreign currency trading is carried out using programs supplied free by forex brokers based in many countries around the world. An individual can open an account with a broker, and be given free training and the necessary facilities which enable him or her to monitor the market using on-line charts and other indicators, then make real-time transactions online. It is not necessary to have high speed internet access, but a reliable connection can be important while short term trades are running.

In order to start trading, an account needs to be opened with a forex broker such as eToro. Start with a free demo account, then when you are ready, open a $50 (or more) live trading account quickly by various means including Credit Card, PayPal, Wire Transfer, Neteller, Western Union, MoneyGram and WebMoney, then start trading with their very user-friendly interface or 'trading platform'.

A small part of the money you deposit in your trading account is used as collateral – like a guarantee for each trade while it is in progress. A trader may enter several trades simultaneously. When a trade is complete, the guarantee is returned to the account, together with any profit.

Forex day trading does not involve buying and selling actual currency; it's more like taking a temporary 'option' on it, for which you put up a small deposit. Most beginners start with a free demo account which does not require 'real' money at all (see below).

Live trading
Standard trades are conducted in $100,000 'lots', but only a small amount (1%) of this is required to be used as a guarantee for a running trade. Typically, experienced traders will lodge between $2,000 and $50,000 with their bank, broker or dealer, but rarely risk more than 2-5% of this for trade guarantees at one time.

 

Live trading with low risk
'Mini' and 'micro' accounts can also be opened with much less, from $50 to a few hundred dollars. These accounts work the same way as standard accounts, usually of several thousand dollars, but trades (and profit or loss) are made at lower proportions of full 'lot' values. Trading with low amounts lowers the risk of loss for new or inexperienced traders.