The beginners guide to the Forex Market – Part 1

What exactly are the basics of the Forex market?

For those who are new to the world of Forex need to know that a Forex trader uses a special software and brokerage accounts to access the international currency market and place trades. The trades are actually made and financed by the brokerage. The brokerage makes its money by charging fees for this particular service that it offers, and then the money lent to cover the costs of the trades needs to be paid back.

The trader is supposed to be able to make enough money off the trades to cover his costs and make a profit, or else, he will only be faced with losses in the market. The profits are generated from the differences between the values of the currencies involved. In theory, a person should be able to make a profit by anticipating the differences. If the US dollar is worth $1.60 in Canadian dollars, the trader should be able to make 60 cents by converting the US to Canadian dollars.

Traders take up many different approaches to try to determine when they can make the most money by making a transaction. Since the market is completely computerized, the speculators can make instant transactions and earn an instant profit. Many Forex enthusiasts try to automate their trading with computer programs called trading robots. These automatically buy and sell contracts when the market hits a certain level. Some people believe these programs will generate an automatic stream of income.

What exactly are the items that are traded in the Forex market?

Oil, gold and silver are some of the commodities traded in the Forex market though the major items traded are currencies which are traded in pairs. For instance, the British pound and the Japanese yen (GBP/JPY), or the euro and the U.S. dollar (EUR/USD) are basic examples of currency pairs.

Methods to invest in currencies

Spot Market– In the spot market, currencies are traded immediately or “on the spot,” using the current market price.

Futures– Futures are contracts to purchase or sell a particular asset at a particular fee on a date in the future.

Options– An “option” is a financial instrument that gives the buyer the ability, or the option, but not the obligation, to purchase or sell an investment at a specified price on the option’s completion date.

Hedging:

Hedging is a basic method that is meant to cut down the risk factor that is typically involved in Forex trading by taking both sides of a trade simultaneously. Provided that the concerned broker permits it, an easy way to hedge is simply by beginning a long and a short position on the same pair. In some case advanced traders employ two different pairs to make one hedge, however that can be extremely complex. For a case in point, a trader wishes to go short on the USD/CHF, as it has the best price range. After the short is initiated, if the USD/CHF looks a little strong and the trader might feel that it might break upward and makes the short pricey ,  so as to carry out what can be considered a balancing act, other USD pairs are being looked at. In case the EUR/USD moves inversely to the USD/CHF, the trader goes short on EUR/USD. Thus, the USD moves strongly against the CHF. So short EUR trade turns profitable and on the other hand the USD/CHF trade does not yield much, however the risk factor is cut down considerably as the two factors negate each other.

  • Position Trading:  The trading that is typically dependent upon the general exposure of a trader to a currency pair is known as position trading.
  • Forex Option: The agreement to buy a currency pair at a preset price at a particular time is referred to as Forex option

Scalping in Forex:

Scalping typically implies making an extremely short term trade for a few pips generally making use of high leverage. Generally, scalping in Forex is most effective together with a news release and supportive technical conditions. The trade typically has the potential to range from a few seconds to several hours too. Taking into account the risk factor that comes with scalping in Forex, this Forex trading technique does not yield much. Thus, it is recommended that in order to carry out scalping trades, it is most effective to do them together with an overall position of a trader. It should be utilized as a primary method of trading.

Guidelines for Advanced Forex Trading:

  • For maximizing gains in Forex, a trader should primary set a goal for himself. After that, it is necessary for the trader to pick a trading technique consistent with the goals that he has set for himself.
  • Deciding on a suitable broker who satisfies the needs and requirements of a Forex trader is of paramount importance. You are literally nothing without your broker, and you need to pay ample attention to its selection.
  • Trading should be always done in well-recognized currency pairs. The market trends needs to be analyzed perfectly. Decisions should be taken taking the market trends into account.
  • Advanced trading techniques should be employed carefully and it may provide an edge over one’s competitors.

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