Forexunderstanding

Forex Trading Education: Things You Should Know About Forex Trading

How difficult is it to make money trading the Forex market? How much time does it take to actually be able to make a living trading the Forex market? These and other important aspects of trading are to be discussed in this article.

Trading the Forex market has many benefits over other financial markets, among the most important are: superior liquidity, 24hrs market, better execution, and others. Traders and investor see the Forex market as a new speculation or diversifying opportunity because of these benefits. Does this mean that it is easy to make money trading the Forex Market? Not at all.

Forex brokers agree that 90% of traders end up losing money, 5% of traders end up at break even and only 5% of them achieve consistent profitable results. With these statistics shown, I dont consider trading to be an easy task. But, is it harder to master any other endeavor? I dont think so, consider musicians, writers, or even other businesses, the success rates are about the same, there are a whole bunch of them who never got to the top.

Now that we know it is not easy to achieve consistent profitable results, a must question would be, Why is it that some traders succeed while others fail to trade successfully in the Forex market? There is no hard answer to this question, or a recipe to follow to achieve consistent profitable results. What we do know is that traders that reach the top think different. Thats right, they dont follow the crowd, they are an independent part of the crowd.

A few things that separate the top traders from the rest are:

Education: They are very well educated in the matter; they have chosen to learn every single and important aspect of trading. The best traders know that every trade is a learning experience. They approach the Forex market with humility, otherwise the market will prove them wrong.

Forex trading system: Top traders have a Forex trading system. They have the discipline to follow it rigorously, because they know that only the trades that are signaled by their system have a greater rate of success.

Price behavior: They have incorporated price behavior into their trading systems. They know price action has the last word.

Money management: Avoiding the risk of ruin is a primary subject to the best traders. After all, you cannot succeed without funds in your trading account.

Trading psychology: They are aware of every psychological issue that affects the decisions made by traders. They have accepted the fact that every individual trade has two probable outcomes, not just the winning side.

These are, among others, the most important factors that influence the success rate of Forex traders.

We know now that it is not easy to make money trading the Forex market, but it is possible. We also discussed the most important factors that influence the rate of success of Forex traders. But, how much time does it take to have consistent profitable results? It is different from trader to trader. For some, it could take a life time, and still dont get the desired results, for some others, a few years are enough to get consistent profitable results. The answer to this question may vary, but what I want to make clear here is that trading successfully is a process, its not something you can do in a short period of time.

Trading successfully is no easy task; it is a process and could take years to achieve the desired results. There are a few things though every trader should take in consideration that could accelerate the process: having a trading system, using money management, education, being aware of psychological issues, discipline to follow your trading system and your trading plan, and others.

One of the most appealing ways to attain wealth is to play the stock market. With the advent of the Internet and on line brokers traders have seemingly unrestricted access to various trading products that just 10 years ago were reserved for big financial institutions. A trading product that has been overlooked by many traders is forex.

Forex is derived from the words FOReign EXchange and involves the trading of currencies. Until relatively recently trading forex has been the preserve of banks and other large financial institutions. In the last 5 years forex trading has literally exploded among ordinary traders. When the advantages of forex trading become apparent this is not surprising. The forex market is the largest financial market in the world with an estimated daily turnover of 1.5 trillion pounds. This is 30 times larger than all the US stock markets combined. Further more the forex market is open 24 hours a day 5 days a week.

The size of the forex market is one of its first benefits. The forex market is very liquid and has high volume. Liquidity is a great asset many traders look for because it means a deal can always be done. Forex is a continuous 24-hour market. This is very desirable if you wish to trade part-time as you can choose what time you trade unlike stock markets that are open only 8 hours a day. This 24-hour market almost removes the problem of gapping. Because most stock markets are only open 8 hours a day often-overnight events can cause stocks to gap up or down. Large gaps can especially cause large losses for people who trade derivative products like futures or options. In the forex market the problem of gapping is very much reduced.

Currencies are always traded in pairs. Usually currencies are traded in pairs against the US pound. The main pairs are US pound Vs EURO ( EUR), British Pound (GDP), Swiss Franc (CHF), Japanese yen (JPY), Australian pound (AUS), New Zealand pound (NZD) and the Canadian pound(CAD). There are other currencies pairs but most traders prefer to trade the pairs above. These currency pairs are known as the majors. Currency traders have plenty of trading opportunities from these 7 major currency pairs. Compare this against the stock market where more than 8,000 stocks trade on the three primary US stock exchanges and currency traders can focus just on these 7 pairs and still make plenty of money.

Unlike the stock market there is never bullish or bearish market conditions. Currencies go up or down against each other according to how the world financial markets perceive the value of the currencies. You can sell a currency (go short) just as easy as you can buy a currency( go long). Currencies go up and down and you can trade either direction just as easily ensuring there is always plenty of trading opportunities.

Forex brokers dont charge commission or brokerage. This can be quite a large overhead in other financial markets. Forex brokers make their money on the difference between the bidask spread of a currency pair. As the forex market is very liquid the spread between the bidask is very small. As many stock traders know brokerage can be a significant transaction cost.

You can start trading forex for as little as 300 pounds. There are two types of accounts a mini forex account and regular forex account. Most forex brokers offer 100: 1 leverage which means a in a mini account you can control 10,000 currency position with 100. In a regular account 1000 controls a 100,000 currency position. This provides great leverage and an extremely efficient use of trading capitol.

Trading a mini account is a great way on how to learn to how to trade forex. When you paper trade you are having a comfortable armchair ride. You are trading without the emotions of putting real money on the table. When you trade a 1 mini currency lot you can set your stop loss so the most you lose is 100. This is a great way to learn how to trade effectively without risking much money. In most other trading products even when trading with the smallest trading lot possible you would have to risk much more. Forex provides trading opportunities for people without much trading capitol.

Many traders have overlooked forex trading. It has many benefits that all
traders can use to their advantage. It offers the benefit of trading 24 hours a day in any country in the world. The forex market is a very lucrative market no trader can overlook it.

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity
Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion pounds traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market
This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.
Leverage trading

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US100,000 position, only US1,000 are needed on margin to be able to open that position.

Low Transaction costs
Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment
The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as 300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading
The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.

Trading from anywhere
If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.

Forex market vs. Equity markets

Liquidity
FX market: Near two trillion pounds of daily volume.
Equity market: Around 200 billion on a daily basis.

Trading hours
FX market: 24hr market, 5.5 days a week
Equity market: Monday through Friday from 8:30 EST to 5:00 EST

Profit potential
FX market: In both, rising and falling markets.
Equity market: Most tradersinvestor profit only from rising markets.

Transaction costs
FX market: Commission free and tight spreads.
Equity market: High Commissions and transaction fees.

Buying power
FX market: Leverage up to 400:1
Equity market: Leverage from 2:1 to 4:1

Specialization
FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD)
Equity market: More than 40,000 stocks to choose from

Forex market vs. Futures market

Liquidity
FX Market: Near two trillion pounds of daily volume.
Futures market: Around 400 billion pounds on a daily basis.

Transaction costs
FX market: Commission free and tight spreads.
Futures market: High commissions fees.

Margin
FX market: Fixed rate of margin on every position.
Futures market: Different levels of margin on overnight positions than day time positions.

Trade execution
FX market: Instantaneous execution.
Futures market: Inconsistent execution.

All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.

The Forex market is widely known by its high liquidity and high volume of transactions occurring during most of its long trading week. These characteristics highly contribute to make the Forex market a very trendy market with few trend-less periods during the whole trading period.

But what does this mean to the Forex trader? Mainly this trendy characteristic of the currency markets means that there will be plenty of opportunities for the trader to find profitable trades during the day.

As you start analyzing forex charts you will realize that the market often display’s some very familiar patterns of price movement, this is; trends; and you will notice that once a pattern is established, it becomes the most probable course of future price action until the market changes. Giving you a good forecast of what comes next with the currency prices.

There are two types of markets which will become very important for you to identify and understand; these are: trending and, the less frequent, trend-less markets. Each market type has two specific patterns which you will also notice over time.

A Trending market is defined as a steady, elongated price movements with less than a 45 degree angle with occasional pauses, profit taking, or resting periods.

In a Trending market, you will notice two main and quite evident patterns:

Uptrends – A pattern of higher highs and higher lows.

Downtrends – A pattern of lower lows and lower highs.

There is also the less frequent kind of market, this is a Trend-less market with erratic price movements which are often steep (greater than 45 -degree angle) and cannot sustain and therefore must reverse. Although the movements can move many points in a short period of time, they are constantly and rapidly oscillating with the consequence that they often result in very little net price movement over time.

In a Trend-less market, you will find these main patterns:

Choppy – An erratic pattern of higher highs and lower lows.

Sideways – A narrow pattern of lower highs and higher lows.

While up-trend and down-trend periods will offer excellent trading results most of the time, choppy markets often create stop outs, this is they activate your stops by constantly overshooting your projected resistance level but without never really crossing too far from this level; while sideways markets produce for little in either direction making them hard to trade and to make any profit during these periods.

As always in Forex, your main trading objective is to get into profitable trades most of the time and a trending market is the perfect situation to find this profitable trades by riding the trends until you make your target profit objective of the day.