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Forex
Basics
I hope you have already gone through some of the forex websites. If not, you may google search using keyword online forex trading and read the information given in some of the forex wesites. Assuming that you all are familiar to stock market, I will start with a comparison to stocks. Both stocks and forex are considered as high risk/high returns business. Unlike stock markets which are different for different countries, forex is one single market and daily turnover of the market is approximately USD 3 trillion! Market is open from Monday to Friday and its a 24 hours market. Everybody needs foreign exchange, whether you are an exporter or importer or a tourist. If a UK company has to takeover an Australian company they will have to sell pound and buy Australian dollar which may make Pound weaker against AUD. If you are an exporter you repatriate your funds from other countries in euro or dollar or any other currency and convert it into your local currency. This is one of the reasons why yen becomes strong against dollar before their annual book closing. Japan has a trade surplus against US. (exports>imports) A Market that never crashes! Almost all the hedge funds, mutual funds, pension funds or any investment companies and individual investors trade in forex and take advantage of the currency movements. Simple logic is buy low sell high. short selling is possible here. Short selling means selling somehting which you haven't bought. In stocks you may short sell and buy back on the same day before the market closing and may make some profits or loss. You will not be allowed to carry forward your trade for next day. (it is possible in some countries or with some brokers) but in forex you can sell euros against dollars (u need not have euros) and close the deal (buy euro against dollar) after 15 days or a month and take your profits. So whichever side market moves you can make money. You need not worry if euro crash or yen crash or any other currency crashes. We can say forex market never crashes. Example euro/usd is at 1.4200 and f it falls to 1.3900 we can say USD strenthened against euro. Euro and USD cannot fall at the same time. So you can make money if euro falls or USD falls. You just have to be in the right side of the market. KK's Hope and Fear Theory There is only one reason for a person to loose in forex. I call it as hope and fear theory. When the market goes against trader he will keep the position hoping that market will bounce back. when the market is in his favour he will have a fear that market may bounce back and he will loose the profits. HOPE lets him keep a loosing position till he looses 99% of the account and due to fear he will grab small profits and miss out the big profits. If you see the statement of a forex trader who has lost money, you will notice many trades made with smal profits and very few loss making trades. but loss will be bigger than profits. This is because 'hope and fear' applies to most of the forex traders. To make money, you just have to do opposite. Cut loss and let the profits run.If you apply this strategy, you may have more loss making trades but total profits in few profit making trades will be larger the total loss made in other trades. So, your statement will look just opposite of the forex trader who has lost his investment.Leverage Leverage means buying stocks or forex with margin money. With a deposit of $1000 broker will allow you to buy currency worth $100,000 to $500,000. In stock market leverage could be 1:4 to 1:10 means broker may allow you to buy stocks worth 4 to 10 times of your investment. Leverage makes trading risky. One can make 1000% profits a month or lose all the investment by using very high leverage. We recommend 1:10 to 1:20 leverage in forex trading. Trading lots In forex, currencies are bought in lots. Standard lot means 100,000. If you are buying 1 standard lot EURO/USD you are buying 100,000 euros against USD. Few years back forex brokers introduced mini lots of 10,000 size. Recently Micro lots were introduced. Size of micro lot is 1000. buying 1 micro lot of USD/JPY means buying 1000 dollars aginst Japanese Yen. Currencies
that are traded most Bid and Ask If you go to any exchnage you will notice 2 prices. One is a buying price and one is a selling price. If you see EURO/USD quote as 1.4200 / 14205 the pair is bid at 1.4200 and asked at 1.4205. In simple words if you sell Euros, you get 1.4200 US Dollars and if you want to buy Euros you have to pay 1.4205 US Dollars. The difference which is 0.0005 is called spread which is the profit of the broker. If you see the quote for USD/JPY as 99.30/99.32 spread is 0.02. We say spread in euro/usd is 5 pips and spread in usd/jpy is pips. Pip is the last decimal in a currency pair. If EURO/USD goes up from 1.4300 to 1.4310, you can say EURO/USD went up by 10 pips. If you buy USD/JPY at 99.30 and sold at 99.60 you made 30 pips profits. Using Meta Trader Platform for Demo/Live trading Meta Trader is a popular trading platform used by many forex brokers. Download the trading station from here and install the software. See how the trade station looks after you install it. http://www.forexveda.com/mt4screenshot.jpg You can see 3 main windows. 1st window is called market watch. Right click on that and select Show All. You will see all currency pairs offered by the broker. Right click in the same window again and select High/Low and day high and day low will appear. You can increase the width of the market watch window by using click and drag of mouse. Chart window is at the right side of the trade station. If you dont see charts, right click on any currency pair and select Chart window. You can adjust the size and positons of the charts using mouse. We normally use candle stick charts. So, right click on a chart, select properties and select common-->candle stick and click ok. you can right click on the chart and zoom in or zoom out for better view 3rd window which is at the bottom is called Terminal Window. This window has Trade, Account History, Alerts..etc. If you dont see terminal window, click on View at the top and select terminal. Now click on Trade. This will show you the account balance, equity, open positions and waiting orders. Open postions will appear above balance and waiting orders will appear below. You can click on account history and see your past trades. By right clicking, you can chose the dates also. If you chose Today, only trades done Today will appear. For those who do not like to spend more time infront of the computer, there is a alert feature. You can set alerts for any price. Example if you have boght euro at 1.4230 and you want computer to alert when it goes above 1.4300 click on alert, right click and select create and chose euro and select bid> and give 1.4300 System will give a sound alert when the price goes above 1.4300 Opening
a Demo account Making a Trade Double click on any currency. Order window will appear. You can buy or sell at market price by chosing type as instant execution. Trade will be done at whatever price available. If you want to leave a limit order, change the type as Pending Order. If market price is 1.4200 and if you wish to buy at 1.4150 you can leave a limit order. Whenever price reaches that level, broker will buy euro at 1.4150. Stop Loss and Target While buying or after buying you can set stop and take profit level. Order window has option to set stop loss and profit level. You can decide how much risk to take in a particular trade and how much profit to make. Say you buy EURO/USD at 1.4200 and set a stop loss at 1.4120 (80 pips) and target at 1.4300 (100) your position will be closed at whichever price reaches first. If 1.4120 reaches first your trade will be closed at loss. If 1.4300 reaches first your trade will be closed at profit. To keep a stop loss or profit target after opening the position, go to trade in terminal window, select your trade, right click and select modify or delete order. If the position is already open, you cannot delete it. You can only set or modify stop loss and target. If you have left a limit order, you can modify entry, stop and target. To close an open positon at the market price, right click on the trade at the trade window and select close. lesson
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