Introduction to Currency Trading
The foreign
exchange market (forex or FX for short) is one of the most exciting, fast-paced
markets around. Until recently, forex trading in the currency market had been
the domain of large financial institutions, corporations, central banks, hedge
funds and extremely wealthy individuals. The emergence of the internet has
changed all of this, and now it is possible for average investors to buy and
sell currencies easily with the click of a mouse through online brokerage
accounts.
Daily
currency fluctuations are usually very small. Most currency pairs move less
than one cent per day, representing a less than 1% change in the value of the
currency. This makes foreign exchange one of the least volatile financial
markets around. Therefore, many currency speculators rely on the availability
of enormous leverage to increase the value of potential movements. In the
retail forex market, leverage can be as much as 250:1. Higher leverage can be
extremely risky, but because of round-the-clock trading and deep liquidity,
foreign exchange brokers have been able to make high leverage an industry
standard in order to make the movements meaningful for currency traders.
Extreme
liquidity and the availability of high leverage have helped to spur the
market's rapid growth and made it the ideal place for many traders. Positions
can be opened and closed within minutes or can be held for months. Currency
prices are based on objective considerations of supply and demand and cannot be
manipulated easily because the size of the market does not allow even the
largest players, such as central banks, to move prices at will.
The forex
market provides plenty of opportunity for investors. However, in order to be
successful, a currency trader has to understand the basics behind currency movements.
The goal of
this forex tutorial is to provide a foundation for investors or traders who are
new to the foreign currency markets. We'll cover the basics of exchange rates,
the market's history and the key concepts you need to understand in order to be
able to participate in this market. We'll also venture into how to start
trading foreign currencies and the different types of strategies that can be
employed.
What Is Forex?
The foreign exchange market is the "place" where
currencies are traded. Currencies are important to most people around the
world, whether they realize it or not, because currencies need to be exchanged
in order to conduct foreign trade and business. If you are living in the U.S.
and want to buy cheese from France, either you or the company that you buy the
cheese from has to pay the French for the cheese in euros (EUR). This means
that the U.S. importer would have to exchange the equivalent value of U.S.
dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt
can't pay in euros to see the pyramids because it's not the locally accepted
currency. As such, the tourist has to exchange the euros for the local
currency, in this case the Egyptian pound, at the current exchange rate.
The need to exchange currencies is the primary reason why
the forex market is the largest, most liquid financial market in the world. It
dwarfs other markets in size, even the stock market, with an average traded
value of around U.S. $2,000 billion per day. (The total volume changes all the
time, but as of April 2004, the Bank for International Settlements (BIS)
reported that the forex market traded U.S. $1,900 billion per day.)
One unique aspect of this international market is that there
is no central marketplace for foreign exchange. Rather, currency trading is
conducted electronically over-the-counter (OTC), which means that all
transactions occur via computer networks between traders around the world,
rather than on one centralized exchange. The market is open 24 hours a day, five
and a half days a week, and currencies are traded worldwide in the major
financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong,
Singapore, Paris and Sydney - across almost every time zone. This means that
when the trading day in the U.S. ends, the forex market begins anew in Tokyo
and Hong Kong. As such, the forex market can be extremely active any time of
the day, with price quotes changing constantly.
What is Islamic Forex
The Forex market and specifically, the retail market has traders from all around the globe. As a result, new types of trading accounts were created to fill the needs of the different types of Forex traders. One such account is what is referred to as Islamic Forex accounts.
The reason they are called Islamic Forex accounts or Shariah forex accounts is not because you must be a Muslim to open an Islamic Forex account. That might cause legal problems. The reason they are called Islamic Forex accounts is because they were created to meet the needs of the Islamic trading community.
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According to Islamic law, or Shariah law, it is forbidden for Muslims to expect anything in return for their giving, and it is therefore forbidden to pay or accept any sort of interest in the financial markets. Islamic Forex accounts offer No Riba Forex (Forex with no interest).
This is very relevant when it comes to the Forex market and the concept of rollover fees. Rollover fees are interest fees that Forex traders pay when leaving a position open overnight. They are also referred to as SWAPs and are intended to cover the fees that the banks charge for leaving transactions open overnight. Islamic Forex accounts are therefore Swap free Forex.
Islamic Forex accounts are regular Forex accounts without any sort of interest fees or commissions. As mentioned, you do not have to be a Muslim to open an Islamic Forex account, but they do generally come with certain downsides. These might include higher spreads, hidden charges, or a limitation on how long a position can remain open.
Additionally, if a client opens an Islamic Forex account and abuses it by implementing Carry Trades, the Forex company will most likely close the account. Carry Trades are when the trader opens one Islamic Forex account, and one standard account, and uses the two accounts to balance each other out. What ends up happening is that the trader walks away with the difference, which in this case is the earned interest.
In conclusion, Islamic Forex accounts are very common with many Forex brokers, but must be used wisely and responsibly, just like everything else in Forex trading. The following are some of the primary characteristics of Islamic Forex trading accounts:
Swap Free Forex Account: In Forex trading, when traders leave positions open overnight, it is referred to as a rollover. This usually entails rollover fees, but when trading with a Forex Islamic account, these fees are waved.
No Riba: According to Islamic law, giving or taking interest on transactions is strictly forbidden. This of course presents a problem when dealing with banks or other financial institutions. With Forex Islamic accounts, all "Riba" charges are canceled.
Musharaka: This term refers to a collaboration between two players. In this case, the profits and losses are split based on a predefined ratio.
Forex Basics
What is Forex trading?
The foreign exchange market, also known as Forex, or FX, is the world's largest financial market with over three trillion Dollars traded every day. The Forex market is based on the trade of the world's currencies.
How does Forex trading work?
Forex trading is conducted in pairs. The trader always trades one currency against another. Some examples of the major pairs include the EUR/USD, USD/JPY, EUR/JPY, GBP/CHF, and CAD/USD among others. When you open a Forex trade, you go “long” on one currency and go “short” on the other. The Forex market does not have a centralized location and is therefore a very flexible trading option for people around the globe.
Forex trading is conducted in pairs. The trader always trades one currency against another. Some examples of the major pairs include the EUR/USD, USD/JPY, EUR/JPY, GBP/CHF, and CAD/USD among others. When you open a Forex trade, you go “long” on one currency and go “short” on the other. The Forex market does not have a centralized location and is therefore a very flexible trading option for people around the globe.
Is Forex trading risky?
In one word, yes. However, there are various tools and techniques one can use to reduce the risk. These include market analysis (technical or fundamental), trading systems, signal providers, and Forex robots. However, the best way to avoid high risks in Forex is to educate yourself about the Forex market before trading real money. Additionally, experts recommended you use a demo account for an extended period of time before risking money.
In one word, yes. However, there are various tools and techniques one can use to reduce the risk. These include market analysis (technical or fundamental), trading systems, signal providers, and Forex robots. However, the best way to avoid high risks in Forex is to educate yourself about the Forex market before trading real money. Additionally, experts recommended you use a demo account for an extended period of time before risking money.
When is the Forex market open?
The Forex market has the most flexible hours with true 24 hour trading. The Forex day starts in Sydney and moves around the globe first to Tokyo, then London, then NY.
The Forex market has the most flexible hours with true 24 hour trading. The Forex day starts in Sydney and moves around the globe first to Tokyo, then London, then NY.
How does Forex trading compare to stocks or
mutual funds?
Forex and stocks have a lot in common but generally speaking, Forex is shorter term trades than other markets. Most Forex traders do not leave positions open overnight, which involves a fee called a “Rollover Fee”. In addition, the stock market is significantly smaller than the Forex market making it a more difficult trade to master.
Forex and stocks have a lot in common but generally speaking, Forex is shorter term trades than other markets. Most Forex traders do not leave positions open overnight, which involves a fee called a “Rollover Fee”. In addition, the stock market is significantly smaller than the Forex market making it a more difficult trade to master.
How long are Forex positions maintained?
This very much depends on the preferences of the trader but statistics show that over 80% of Forex trades last for seven days or less and over 40% for two days or less. Generally speaking, Forex traders close their positions when they have achieved their profit goals for that trade, the Stop Loss is triggered as a result of reaching a maximum level of loss, or a new position has become available and the trader wants to reallocate the funds.
This very much depends on the preferences of the trader but statistics show that over 80% of Forex trades last for seven days or less and over 40% for two days or less. Generally speaking, Forex traders close their positions when they have achieved their profit goals for that trade, the Stop Loss is triggered as a result of reaching a maximum level of loss, or a new position has become available and the trader wants to reallocate the funds.
How often are Forex trades made?
Since most brokers do not charge commission on opening a new position and the Forex market is open almost around the clock, most trades open multiple positions throughout the day. According to recent studies, the average Forex trader opens approximately ten to twenty new positions every day.
Since most brokers do not charge commission on opening a new position and the Forex market is open almost around the clock, most trades open multiple positions throughout the day. According to recent studies, the average Forex trader opens approximately ten to twenty new positions every day.
Forex First Steps
What do I need in order to start trading Forex?
As opposed to other markets, you really do not need much to trade Forex. No license is required, and you can trade Forex with a very small initial capital. However, it is not recommended to jump into Forex trading without massive preparation before. This should include reading, studying, and familiarizing yourself with the ins and outs of the market as well as choosing a top reliable broker with whom you can trade.
What do I need in order to start trading Forex?
As opposed to other markets, you really do not need much to trade Forex. No license is required, and you can trade Forex with a very small initial capital. However, it is not recommended to jump into Forex trading without massive preparation before. This should include reading, studying, and familiarizing yourself with the ins and outs of the market as well as choosing a top reliable broker with whom you can trade.
Forex Currencies
How are the prices of the currencies determined?
The Forex market is among the most volatile markets on the globe and with its 24 hour schedule, the market never rests. The prices are based on a wide spectrum of factors both economic and political. Anything can affect the movement of the Forex market, but the main factors that drive the currencies are interest rates, inflation, and political stability. Governments often jump into the Forex trading arena in order to affect the prices of currencies. They do this by flooding the market with their currency in order to lower its price or buy out large sums of their currency in order to raise its value. However, as a result of the Forex market's size, there is no one entity that can truly affect the market is a serious manner.
How are the prices of the currencies determined?
The Forex market is among the most volatile markets on the globe and with its 24 hour schedule, the market never rests. The prices are based on a wide spectrum of factors both economic and political. Anything can affect the movement of the Forex market, but the main factors that drive the currencies are interest rates, inflation, and political stability. Governments often jump into the Forex trading arena in order to affect the prices of currencies. They do this by flooding the market with their currency in order to lower its price or buy out large sums of their currency in order to raise its value. However, as a result of the Forex market's size, there is no one entity that can truly affect the market is a serious manner.
How
can I manage my risks in the most efficient way?
There are many ways to avoid high Forex risks, but the primary tools used by most traders are stop losses, take profits, and limit orders. Using these tools, you can minimize your risks while maximizing your potential for profits.
There are many ways to avoid high Forex risks, but the primary tools used by most traders are stop losses, take profits, and limit orders. Using these tools, you can minimize your risks while maximizing your potential for profits.
Is Forex trading lucrative?
The possible rewards of Forex trading are pretty much endless. Most Forex brokers offer high leverage offering the ability to trade tens and hundreds of thousands of Dollars with as little as a few hundred Dollars of equity. Some brokers offer a leverage as high as 500:1. Obviously, the higher the leverage, the larger the potential for profit, but with that potential comes a higher level of risk as well.
The possible rewards of Forex trading are pretty much endless. Most Forex brokers offer high leverage offering the ability to trade tens and hundreds of thousands of Dollars with as little as a few hundred Dollars of equity. Some brokers offer a leverage as high as 500:1. Obviously, the higher the leverage, the larger the potential for profit, but with that potential comes a higher level of risk as well.
Is Forex an expensive habit?
Well, that very much depends how you trade. However, unlike many other markets, Forex trading can be a very inexpensive habit. With most brokers offering at least a 100:1 leverage, traders can trade tens of thousands of Dollars with as little $500.
Well, that very much depends how you trade. However, unlike many other markets, Forex trading can be a very inexpensive habit. With most brokers offering at least a 100:1 leverage, traders can trade tens of thousands of Dollars with as little $500.
What is the best Forex strategy to use?
This is a question that occupies the minds of the world's most well known Forex experts. There is no one right answer to this, but there is one basic principle when it comes to a Forex trading strategy. The important thing is that a trader has some sort of strategy. This is what differentiates Forex trading from gambling. You can use one of hundreds of available Forex trading strategies to maximize the potential of the Forex market. Many traders find it challenging to stick to their strategies when it dictates to pull out of a trade even when it is a winning trade. The important thing is that traders use strategies and stick to them
This is a question that occupies the minds of the world's most well known Forex experts. There is no one right answer to this, but there is one basic principle when it comes to a Forex trading strategy. The important thing is that a trader has some sort of strategy. This is what differentiates Forex trading from gambling. You can use one of hundreds of available Forex trading strategies to maximize the potential of the Forex market. Many traders find it challenging to stick to their strategies when it dictates to pull out of a trade even when it is a winning trade. The important thing is that traders use strategies and stick to them
How to choose A Forex broker?
Choosing an online Forex broker might be the most important decision a trader makes. It is therefore very important to make an educated decision. The Web is overflowing with reviews of Forex brokers. It is crucial that traders read them before choosing a broker. DailyForex has put together a comprehensive list of Forex broker reviews for your Forex research.
Choosing an online Forex broker might be the most important decision a trader makes. It is therefore very important to make an educated decision. The Web is overflowing with reviews of Forex brokers. It is crucial that traders read them before choosing a broker. DailyForex has put together a comprehensive list of Forex broker reviews for your Forex research.
What features should I look for in a Forex
broker?
There are a lot of characteristics a trader should look for in an online Forex broker. This can be anything from the website, to their customer support, their trading platform, their platform’s features, and their Forex trading spreads. It is important to read in depth reviews before selecting your broker, and a good start is reading DailyForex’s thorough Forex broker reviews.
There are a lot of characteristics a trader should look for in an online Forex broker. This can be anything from the website, to their customer support, their trading platform, their platform’s features, and their Forex trading spreads. It is important to read in depth reviews before selecting your broker, and a good start is reading DailyForex’s thorough Forex broker reviews.
How do I know if a Forex broker is a scam?
Forex scams are very common, and it is the trader’s responsibility to do the necessary research before selecting a Forex broker. Reading online Forex reviews is the first step, but then a trader should also read forums and experiences from other traders who used the specific broker.
There are some Forex Signals tools available
Best Forex Signals
Forex scams are very common, and it is the trader’s responsibility to do the necessary research before selecting a Forex broker. Reading online Forex reviews is the first step, but then a trader should also read forums and experiences from other traders who used the specific broker.
There are some Forex Signals tools available
Best Forex Signals
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