In the past, foreign exchange trading was limited to large players such as national banks and multi-national corporations. In the 1980’s the rules were changed to allow smaller investors to participate using margin accounts. Margin accounts are the reason why FOREX trading has become so popular. With a 100:1 margin account, you can control $100,000 with a $1,000 investment.

A Learning Curve

FOREX is not simple, though, so you’ll need some knowledge to make wise investment decisions. Although it is relatively easy to start trading on the FOREX, there are risks involved. Your first move as a beginner should be to find out as much as possible about the forex market before risking a dime.

Find A Forex Broker

FOREX traders usually require a broker to handle transactions. Most brokers are reputable and are associated with large financial institutions such as banks. A reputable broker will be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud and abusive trade practices.

Open an Account with a forex borker

Opening a FOREX account is as simple as filling out a form and providing the necessary identification. The form includes a margin agreement which states that the broker may interfere with any trade deemed to be too risky. This is to protect the interests of the broker, since most trades are done using the broker’s money.
Once your account has been established, you can fund it and begin trading.

Many brokers offer a variety of accounts to suit the needs of individual investors. Mini accounts allow you to get involved in FOREX trading for as little as $250. Standard accounts may have a minimum deposit of $1000 to $2500, depending on the broker. The amount of leverage (how much borrowed money you can use) varies with account type. High leverage accounts give you more money to trade for a given investment.

Trades are commission-free, meaning that you can make many trades in one day without worrying about incurring high brokerage fees. Brokers make their money on the ’spread’: the difference between bid and ask prices.

Paper Trading Forex Market

Beginning traders are strongly advised get accustomed to FOREX by doing “paper trades” for a period of time. Paper trades are practice transactions that don’t involve real capital. They allow you to see how the system works while learning how to use the various software tools provided by most FOREX brokers.

Most online brokers have demo accounts that allow you to make free paper trades for up to 30 days. Every new FOREX investor should use these demo accounts at least until they are consistently showing profits.

FOREX Software

Each forex broker has its own set of software tools for making transactions, but there are a few tools that are common to all FOREX brokers. Real-time quotes, news feeds, technical analyses and charts, and profit-and-loss analyses are some of the features you can expect to see on most online brokers’ web sites.

Almost every broker operates on the Internet. To access a broker’s online services you’ll need a reasonably modern computer, a fast Internet connection, and an up-to-date operating system. Once your account is set up, you can access it from any computer just by entering your account name and password. If for some reason you are unable get to a computer, most brokers will allow you to make trades over the phone.

There are lots of ways to make money. FOREX trading is just one more potential stream of income if you are prepared to learn and practice.

The word “margin” means something entirely different when dealing with the Forex then it does when dealing with stocks. When dealing with stocks a trader can borrow up to 50% of a stocks value. This can be a pretty costly move as the investor pays an interest to the brokerage firm on the amount of the money that he borrowed. This isn’t the case with Forex Trading.

For example, at $100 a share, 100 shares of Yahoo are valued ad $10,000 ($100 x 100 shares) To trade this stock on margin, the trader is required to pay 50% of the amount and the remaining $5,000 is borrowed and interest has to be paid on that amount. Margin interests differe from broker to broker, but typically you can expect to pay an interest of 1-3% or more.

Now, when dealing with the Forex, margin is the minimum required balance to open a trade. When you open a Forex Trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

For example, if you want to purchase $100,000 of USD/JPY at 100:1 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest. It’s really very important to remember that leverage magnifies your profits AND your losses when Forex Trading. You should monitor your Forex account balance on a regular basis when trading and implement stop-loss orders on every open position to limit the downside risk.

1. Sydney Market: 00:00 (21:00 GMT)

2. Tokyo Market: 02:00 (23:00GMT) until 10:00(7:00GMT) 

3. Singapore and Hong Kong Market: 04:00 (01:00 GMT)

4. Frankfort Market: 09:00 (06:00 GMT)

5. London Market: 10:00 (07:00 GMT) until 18:00(15:00 GMT)

6. European Markets cross with trading peak at 11:00(08:00 GMT)

7. New York Market: 15:00(12:00 GMT) until 23:00(20:00GMT)

Notes:
- London’s market overlaps with New York’s market from 15:00(12:00 GMT) until 18:00(15:00GMT).
- According to trading quantity London’s market is the highest then New York then Tokyo.
- All timings are in Kuwait Time Zone, these timings are subject daylight saving time in the winter.

Understanding Forex Trading Quotes

Being able to read and understand a Forex quote can be a little confusing at first, but for the most part just try an remember two things:
1. The currency listed first is the BASE currency.
2. The value of that BASE currency is always going to be 1.

The US Dollar is the centerpiece of Forex Trading and is typically considered the BASE value. So if your chart reads something like USD/CAD 101.09 this means that $1 US dollar is equal to 101.09 Canadian Dollars. Not too difficult to understand.

Pips

Now lets talk about pips. What is a pip? In Forex Trading, prices are quoted in pips. Pip stands for “percentage in point” and is the fourth decimal point, which is 1/1000th of 1%.

In EUR/USD, a 3 pip Forex spread is quoted and read as 1.2500/1.2503. However there is one exception to the rule, and that’s the Japanese Yen or JPY. In Forex Trading, the JPY quotation only has two decimal points instead of the four as with other major currencies. (JPY 1/100 versus other currencies 1/1000) So a USD/JPY 3 pip spread would read like this 112.02/112.05. This may look a little confusing but as you begin Forex Trading it becomes much easier to understand.

What does all this mean?

Think of your Forex currency pairs as if they were on a teeter totter. When one goes up, the other goes down. So if you are trading the USD/JPY and the price of the US Dollar goes up, then the Japanese Yen goes down. When the price of the Japanese Yen goes up, then the US Dollar goes down.

The most commonly traded pairs in Forex Trading are those that consist the US dollar. In the last post, we mentioned the 6 major Forex currency pairs. For the British Pound (GBP), the Euro (EUR) and the Australian Dollar (AUD), you will see the quote reading something like GBP/USD 1.8306 which means that one British Pound equals 1.8306 US Dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar. In other words, if a Forex quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

A currency pair that does not include the US Dollar is called a “Cross Currency” but the basis is the same. If the pairs read EUR/JPY 127.95, then this means that 1 Euro is equal to 127.95 Japanese Yen.

In Forex Trading you will often see a two sided quote, a “bid” and “ask”. The ‘bid’ is the price at which you can sell the base currency while at the same time sell the counter currency. The ‘ask’ is the price that you can but the base currency while at the same time sell the counter currency. Forex Trading, what a concept.

Leverage & Margin

The leverage that Forex Trading provides is a big attraction to most traders. Leverage trading means that you don’t have to put all the money up to open a position. The banks actually back you on every dollar you trade with. With Forex Trading the leverage can be up to 200 times the value of your account. Now that’s serious leverage. The Forex provides a lot more leverage then either stocks or futures.

There are several reasons for the higher leverage that is offered in the Forex Trading market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade.

Ask (Offer) - price of the offer, the price you buy for.

Bank Rate - the percentage rate at which central bank of a country lends money to the country’s commercial banks.

Bid - price of the demand, the price you sell for.

Broker - the market participating body which serves as the middleman between retail traders and larger commercial institutions.

Cable - a Forex traders slang word GBP/USD currency pair.

CFD - a Contract for Difference - special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying.

Commission - broker commissions for operation handling.

CPI - consumer price index the statistical measure of inflation based upon changes of prices of a specified set of goods.

EA (Expert Advisor) - an automated script which is used by the trading platform software to manage positions and orders automatically without (or with little) manual control.

ECN Broker - a type of Forex brokerage firm that provide its clients direct access to other Forex market participants. ECN brokers don’t discourage scalping, don’t trade against the client, don’t charge spread (low spread is defined by current market prices) but charge commissions for every order.

Fibonacci Retracements - the levels with a high probability of trend break or bounce, calculated as the 23.6%, 32.8%, 50% and 61.8% of the trend range.

Flat (Square) - neutral state when all your positions are closed.

Fundamental Analysis - the analysis based only on news, economic indicators and global events.

GTC (Good Till Cancelled) - order to buy or sell of a currency with a fixed price or worse. The order is alive (good) until execution or cancellation.

Hedging - maintaining a market position which secures the existing open positions in the opposite direction.

Jobber - a slang word for a trader which is aimed toward fast but small and short-term profit from an intra-day trading. Jobber rarely leaves open positions overnight.

Limit Order - order for a broker to buy the lot for fixed or lesser price or sell the lot for fixed or better price. Such price is called limit price.

Liquidity - the measure of markets which describes relationship between the trading volume and the price change.

Long - the position which is in a Buy direction. In Forex, the primary currency when bought is long and another is short.

Loss - the loss from closing long position at lower rate than opening or short position with higher rate than opening, or if the profit from a position closing was lower than broker commission on it.

Lot - definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).

Margin - money, the investor needs to keep at broker account to execute trades. It supplies the possible losses which may occur in margin trading.

Margin Account - account which is used to hold investor’s deposited money for FOREX trading.

Margin Call - demand of a broker to deposit more margin money to the margin account when the amount in it falls below certain minimum.

Market Order - order to buy or sell a lot for a current market price.

Market Price - the current price for which the currency is traded for on the market.

Offer (Ask) - price of the offer, the price you buy for.

Open Position (Trade) - position on buying (long) or selling (short) for a currency pair.

Order - order for a broker to buy or sell the currency with a certain rate.

Pivot Point - the primary support/resistance point calculated basing on the previous trend’s High, Low and Close prices.

Pip (Point) - the last digit in the rate (e.g. for EUR/USD 1 point = 0.0001).

Profit (Gain) - positive amount of money gained for closing the position.

Principal Value - the initial amount of money of the invested.

Realized Profit/Loss - gain/loss for already closed positions.

Resistance - price level for which the intensive selling can lead to price increasing (up-trend)

Settled (Closed) Position - closed positions for which all needed transactions has been made.

Slippage - execution of order for a price different than expected (ordered), main reasons for slippage are - “fast” market, low liquidity and low broker’s ability to execute orders.

Spread - difference between ask and bid prices for a currency pair.

Stop-Limit Order - order to sell or buy a lot when the market reaches certain price. Usually is a combination of stop-order and limit-order.

Stop-Loss Order - order to sell or buy a lot for a certain price or worse. It is used to avoid extra losses when market moves in the opposite direction.

Support - price level for which intensive buying can lead to the price decreasing (down-trend).

Technical Analysis - the analysis based only on the technical market data (quotes) with the help of various technical indicators.

Trend - direction of market which has been established with influence of different factors.

Unrealized (Floating) Profit/Loss - a profit/loss for your non-closed positions.

Useable Margin - amount of money in the account that can be used for trading.

Used Margin - amount of money in the account already used to hold open positions open.

1. The superiority of the trading tools: The Forex trading market mechanism works with excellent tools, with these tools the client can contain the targeted price of any pair between 2 buying/selling orders, on top of the ability of specifying a particular time for the transaction to be executed.
2. The money abundance of the market: The daily size of the traded amounts in this market is very large as it easily exceeds the mounts traded in the regular monetary markets. This attracts the traders that are able to open/close the positions and transactions in the any desired time, size, and quantity.
3. The margin system: Using this system enables the trader to make deals the exceeds his/her capital with a percentage of 1 : 500.
4. Reading the market’s movement: The forex trader can monitor the currency pairs movement through monitoring the charts and graphs which include a predicted movement line shows the expected move of the pair, this is based on the usual behavior of each pair.
5. Fees: The forex trader in this market does not usually pay any fees for the deals except for the difference in points between the demand/ supply prices for every deal, which varies dependant on the broker.
6. The completed transactions: As soon as the forex trader makes the transaction the deal is completely done with the displayed price at the time, this means that the deal is done at once and not broken into parts which can vary in price as happens in other monetary markets.
7. The market Time: The forex market is open 24 hours a day, Sunday to Friday every week, this gives the trader the freedom to work at any time without having to be restricted with opening/closing time as it is a fact in other monetary markets.