When you execute a Forex trade, you are purchasing an amount of currency, termed a lot. The amount of currency in one lot depends upon the type of account you have. In a standard account, one lot is usually equal to U.S. $100,000; in a mini account, one lot is $10,000.
But Forex trading accounts are leveraged, which means you don0t have to own that expensive lot of currency; you just have to control it, and if you do, any profit it earns is yours. To obtain the right to control a lot of currency, you put up a much smaller amount of money in a sort of rental agreement called a margin deposit. In a standard account, to control that U.S. $100,000, you must put up $1,000 of your own money; in a mini account, to control $10,000, you need to put up $100.
The leverage influences the amount of profit you earn, as well. In a standard account, one pip of a currency pair that has the U.S. dollar as the base is equal to U.S. $10; in a mini account, one pip equals to $1. This means that, should you correctly forecast the movement of the market and execute a trade that earns you two hundred pips (not an unrealistic goal), if you have a standard account, your profit will be $2,000; if you have a mini account, it0s $200.
To maximize your profits in Forex trading, you don0t have to trade a standard account; not every beginning trader can afford to. Instead, if you believe you have a good forecast on the market, you can trade more than one lot. To continue the above example, if your successful trade earned you two hundred pips and you had purchased five lots of that currency, in a mini account you would have put up $500 of your own money0but earned a profit of $1,000 (two hundred pips times five lots). In a standard account, you would have put up $5,0000and earned $10,000.
The number of lots you can trade depends upon the margin in your account. That0s not the amount you deposited; that also includes any open trades you have running, taking into account any profits or losses you may incur.
There are two types of orders that can be placed in Forex trading. The most common type is called a market order, and it simply purchases or sells the currency pair at the going market rate. This sort of trade is quickly arranged0with some online trading platforms, one click can do it0so it0s the order you want to place when the market is moving rapidly. (If you do the one-click thing, always edit the trade to put in a stop-loss; more on that in a minute.)
The other kind of order is called an entry order, and it0s what you use when you want to purchase or sell a currency pair but only at a certain price. For example, say the GBP/USD is range-bound, moving sideways in a channel, going up and down but not far enough to entice you into a trade.
But there are indications that the Cable might soon break out of that channel. So you could place an entry order to purchase but only after the price rises above a certain point. If the Cable breaks out, your entry order would be triggered, and you would purchase the currency pair when the price rises above your pre-arranged point. If it doesn0t, you aren0t stuck with a currency pair that0s going nowhere, and the still-dormant entry order would cancel after a certain length of time.
A stop, also called a stop-loss, is a pre-arranged point where you decide you would like to get out of a losing trade. A limit, also called a take-profit, is a pre-arranged point where you decide you would like to exit a winning trade. Although it may not seem so on the surface, both are important. Properly using stops and limits defines the extent of your risk and encourages disciplined trading.
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Simply put, the Forex is the foreign exchange market. It0s where travelers, banks, and companies that do business internationally change money, in effect buying one currency and selling another.
Profits are made from the difference in value between the two currencies (the exchange rate). Because currencies are no longer tied to the gold standard, exchange rates are constantly fluctuating. Speculators trade currencies with the expectation that one will gain in strength against the other. These trades are leveraged, with a small downpayment controlling a much larger sum, so even small changes in value can create large profits or losses.
The Forex is the mother of all markets, with trading of more than U.S. $1.5 trillion daily. That0s more than one hundred times the size of the New York Stock Exchange. Because the market is so large, it0s extremely liquid; there0s always an immediate buyer or seller for any of the major currency pairs. Most of this trading is done for profit; only five percent of the trades made each day are for the purpose of changing currencies for business or travel.
The Forex market is also so large that it cannot be manipulated. Even powerful central banks can0t force the market to do their bidding, as the Bank of England found out in 1992. When the BoE used its reserves to support the pound against the Euro, investors traded against the pound and by sheer numbers overwhelmed the BoE. It0s rumored that one investor, George Soros, made a profit of U.S. $1 billion overnight.
The Forex is a completely virtual marketplace. There0s no building where buyers and sellers meet, or where brokers hang out looking for action. All trading takes place over the telephone or on the Internet. Small investors trade through currency brokers, who in turn place their orders through large banks. Commissions are low and are built into the exchange rate.
It was once said that the sun never set on the British Empire. The same can be said for the Forex trading 0day,0 which lasts roughly six days. It opens in Sydney with the local Monday morning, then moves with the sun to Tokyo, Frankfurt, London, and finally New York, ten back around again to Sydney. It closes in New York on Friday evening. This means that, at any time of the day or night during each work week, some currency, somewhere around the world, is actively trading. The clock may say it0s midnight, but there are still opportunities to make money on the Forex.
These long trading hours allow investors to speculate on the results of world events as they0re happening. If a country has announced that it will release data relating to its economic growth or decline, an investor can take advantage of the influence of that announcement on the country0s currency0even if it0s taking place during his night.
The Forex used to be closed to small investors. It was the private playground of banks, large corporations, and the major players in the money-making game. But a change of laws in 2000 opened the field to everyone. Now online Forex dealers offer multiple options for the small trader or investor, with trading accounts as low as U.S. $300.
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The Forex market has changed through the years, growing in volume and expanding across multiple time zones.
Brokerage houses have changed, too, going online with sophisticated software and powerful servers.
Economic indicators and technical analysis have become more sophisticated, too, until the Forex market of today bears little resemblance to what it used to be.
But there0s one thing that hasn0t changed: most traders lose.
Despite all the advances in the Forex marketplace, the ratio of winners to losers remains low. Experts agree that the most hopeful number that can be advanced is a measly 10%, which means that 90% of all traders on any particular day will lose.
Experts also agree that the reason most traders lose is because they allow their emotions to cloud their judgment.
Most people trade on hope and fear, rather than facts. Rather than basing their trades on what the charts and the indicators actually say, these people trade on what they want them to say. They hang onto a losing trade and follow the graph down, hoping the currency pair will turn around. Or they exit a trade too soon, fearing the trend won0t last, and are satisfied with pennies that even the best Forex money management cannot balance against their losses.
Other people lose through greed, by trying to pick the highs and lows too nicely to maximize their profits to the penny. Rather than waiting to place a trade when the indicators confirm the market0s movement, they jump in too soon and are disappointed when the anticipated break-out never occurs.
Remember, there is no magic software or fool-proof trading scheme. If you cannot control your emotions, then you cannot become a winner despite yourself. But there are things you can do to improve your chances of being one of the winners, and the most powerful is to follow these rules of Forex trading:
Prepare a trading plan, using good Forex money management skills and the trading strategy of your choice0then trade your plan. Don0t alter your plan or fudge your criteria if you don0t see a good trade for a few days; wait for the market to fulfill your requirements before risking your money. Remember the law of averages: sooner or later, the market will come around.
Use stops, and trailing stops when possible, to control losses and protect your profits. Remember to set your stops far enough away from the entry price so that you aren0t closed out by normal market jitters.
Paper trade with a demo account until you are efficient and feel comfortable in the market.
When you move on and start trading with real money, it feels different than paper trading! But this is no time to change your plan. To minimize the effects of emotion, set a small, realistic initial goal and trade until you achieve your goal more often than not. Use small sums in micro or mini accounts. Only when you are comfortable risking your cash and sometimes losing it should you attempt to trade with larger sums of money.
Study your trading record and try to figure out what went wrong when you lost. To put it simply, learn from your mistakes. That alone will put you ahead of the crowd!
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