Foreign Exchange Market (Forex) Beginners Guide
The Foreign Exchange Market (Forex) lets each and every one of us become an active participant in the systematic process of currency trading and currency exchange. This Forex Beginners Guide explains how currency pairing and currency quoting works.
This is because Forex is a global decentralized market designated for the exchange of currency—any currency. Are you hoping to trade U.S dollars for Great Britain pounds?
No problem. Interested in selling Australian dollars and buying Japanese yen? No worries. Forex lets us buy, sell, and trade any and all currencies at current or pre-determined prices.
What should be made clear at this point, however, is that Forex offers more than just currency exchange. It offers ways for individuals just like you to make a meaningful profit.
When you dedicate your attention and time to exchange endeavors and apply the right strategies to particular exchange situations, you possess the ability to generate profit in as little as 24 hours.
Thousands of financially-limited individuals enter the Forex market each day with the twinkle of making an extra few hundred dollars, and hundreds upon hundreds exit positions feeling successful and more financially-free.
Forex and its techniques can be simplified so that its basics can be learned in a matter of minutes, but at that point, you’re not learning about the detailed strategies and techniques of currency trading.
You’re not fully understanding how currency pairing and currency quoting works. You’re not being introduced to the terminologies that you’ll hear casually tossed around the market, the most popular currencies that you’ll want to know the characteristics of or the crucial step-by-step process of creating a personalized trading plan.
In other words, these oversimplified and easy-to-understand-the-moment-you-hear-them explanations won’t do you much good when you finally sit down to trade currency on Forex.
Forex is a complex financial endeavor that requires your time, practice, and patience. With this book, you’ll learn all about the crucial elements and strategies of Forex’s complex market, but you won’t find yourself falling behind in the process.
It is my personal mission to have you achieve your highest financial aspirations.
I’ve included a free book as a bonus to thank you for reading this.
Investing doesn’t have to be a complex and frustrating experience.
You’ll actually enjoy accomplishing MORE in LESS time.
You’ll feel like you’re in the fast lane to your financial goals.
Getting Familiar with Forex
The complex functions and elements of the Foreign Exchange market (Forex) is not something most people pick up on immediately. It’s not even something most people will fully understand over the course of a week.
Understanding Forex is something that takes time, although active participation in the marketplace itself certainly speeds up the learning period. Hands-on learning and experience is an excellent catalyst to Forex and currency exchange success.
You’ll find an actually overwhelming abundance of online articles, personal blogs, podcasts, and videos that talk about the Forex marketplace and the currency exchange process, but many of these sources either focus too narrowly on the basics of the marketplace or skip over the basics and hone in on the marketplace’s complexities.
For the beginner currency trader, neither of these two approaches to Forex is helpful. What you need is a combination of the two —a type of coalesced approach that blends the basic with the complex.
What you need is something that helps you build a foundational knowledge of Forex, and then lets you expand off of that knowledge by introducing more complex topics.
So, we’ll start the first half of that approach in this book. That is, this blog will introduce beginners to the basics of Forex and will help them build foundational knowledge about Forex and its marketplace.
You’ll learn the basics —what Forex is, who the market participants are, what factors affect the market’s conditions, why Forex is such a great marketplace to enter, and what the benefits and disadvantages of Forex trading are.
Getting Acquainted with Forex
Definitions—some people thrive off them, some people detest them. No matter your personal preference, you’ll want to learn to embrace them when it comes to Forex and its marketplace.
Learning and understanding the basic premise of Forex is how you’ll begin to build the foundational knowledge that I’ve mentioned a few times now.
Now, I could rattle off a long-winded definition of Forex, perhaps something along the lines of, “the Foreign Exchange market is a global decentralized marketplace designed and designated for…,” but how helpful would that really be for a beginner trader?
I’d say probably not very since many readers would have to look up what a global decentralized marketplace is first in order to understand the initial definition.
Fortunately, we can skip all of those unnecessary steps by giving a more direct and simple definition that clearly defines Forex and the marketplace without sacrificing any important information or detail. So, let’s start by breaking Forex down into bite-size, manageable pieces.
A global marketplace is available to countries around the world.
A marketplace that allows people or institutions to buy, sell, and/or trade currency.
A marketplace that also allows people or institutions to buy, sell, and/or trade currency for a profit.
A place where currency can be bought, sold, or traded at either current prices or pre-determined values, depending on the Forex market in which you are trading.
A marketplace that does not set the value of the currency. Instead, it determines the current market price value of the currency—the price at which currency is traded.
Not a physical marketplace. It’s an online marketplace where all transactions are handled electronically. These transactions, oftentimes called over-the-counter (OTC) transactions, happen over computer networks and between two parties, two traders.
So there you have it—a neat and (hopefully) easy-to-follow breakdown of the basics of Forex and the Foreign Exchange marketplace. If you’re feeling comfortable with these definitions, feel free to move forward with your reading.
If you’re confused in any way, be sure to review and understand these basics fully before moving on. Remember: we’re building a foundation right now. Any chips in your foundation will affect the layers we add on in later chapters.
Meet the Participants in the Forex marketplace
During your time in the Forex marketplace, you’ll come across a large variety of parties, a Forex marketplace terminology that essentially refers to traders or exchangers of currency. These parties will vary, but usually, consist of either:
Individuals much like yourself who exchange currencies on the Forex marketplace on their own and for their own personal interests,
Financial institutions who employ individuals to conduct currency exchanges throughout the day as a means to generate company profit, or
Banks and governments that require currency exchange transactions for a multitude of reasons, often so that trade can be conducted between themselves and another country that uses a different currency.
What Affects the Market?
If you’re at all familiar with the basics of the stock market, then you’re already in a good position to learn about the Foreign Exchange marketplace. This is because both financial marketplaces are highly volatile—they’re unpredictable, fast-moving, and ever-changing. Stock prices are constantly dipping or rising, and currency price values are always shifting.
What you’ll want to know, however, is that there are particular factors that cause Forex to experience either gradual or sudden changes. Some of these factors include, but certainly, aren’t limited to:
Supply and demand: this is the basic premise to anything and everything relating to financial markets. If you aren’t familiar with this concept, become familiar with it.
Interest rates: currencies with high-interest rates are, for obvious reasons, unfavorable. Traders will often pursue other exchange transactions that offer lower interest rates.
The issuing company’s performance or current events: This includes, but again, is not limited, to a country’s economic performance (are they in debt or are they striving, financially?), or their current events, whether in regards to politics, religion, culture, foreign policy, etc.
Some basic research on a currency beforehand will give you an initial, but incredibly helpful, sense of what specific factors affect the currency you’re interested in trading.
Forex is great for two reasons. First and foremost, Forex offers individual traders and financial institutions the opportunity to generate profit from currency exchange. This is something we’ll discuss in more depth later on this book.
The second reason might not be as interesting, but it’s still very important: Forex is an excellent financial assistant with the international trade because it allows fluid currency conversion between two countries that aren’t on the same currency.
In other words, Forex makes foreign imports and exports possible even though currencies between countries aren’t the same.
For example, let’s say that England wants to trade with France. For those unfamiliar with European currency, England uses the Great Britain pound (GBP) sterling, and France uses the euro. Because of Forex, England and France are able to trade with one another even though they use different currencies.
The workings of this are simple: with Forex, England can easily exchange its currency, GBP, for France’s currency, the euro. Doing so allows England to import goods from France and pay France in euros, even though England’s currency is actually the pound.
Simple enough, right? Essentially, Forex just makes trade between two countries on different currencies simpler—it makes it more fluid.
Here’s a list of additional reasons why Forex is worth your time:
It has high liquidity: Forex is a high liquidity marketplace because of its unparalleled trading volume. In other words, an impressively large number of people, institutions, and governments trade on Forex, which means things move fast.
It’s open 24-hours a day: This excludes weekends, but that’s about it. Because Forex is a global marketplace, it’ll always be open someplace in the world, which means you can trade at any time, Monday-Friday.
If you’re interested in exchanging U.S dollars and Japanese yen, for example, you can sell dollars during the evening after work, and buy yen in the morning before work.
Simply put, it’s huge: Volume-wise, Forex is the biggest marketplace in the world. This is because the Forex marketplace is established, geographically and virtually speaking, around the world. The larger the marketplace, the more possibilities for trade and profit.
It’s used by trillions: Forex has been used over 1.7 trillion times for foreign currency exchange swaps.
Weighing the Benefits with the Disadvantages
As with most things, there are both benefits and disadvantages that come along with Forex and its marketplace. Knowing the elements of both these categories is crucial.
Because Forex is the largest global marketplace, there is an abundance of opportunities to generate significant profit. That’s one of the primary benefits of Forex—more money (who doesn’t find that appealing?)
Forex traders also have the ability to enter positions worth far more money than their initial investment, which is done when you borrow funds from a lender, usually a broker.
This process is called trading on margin. So, a Forex trader can enter a position worth, say, $50,000 after having only put down $5,000 upfront. Your high leverage ($50,000) means your ability to generate greater profit increases, too.
Unlike the stock market where all transactions must be completed in a short 8-hour time frame (most stock markets are only open around 9-4 on weekdays), Forex is open 24-hours a day, Monday-Friday.
This is great for the working and/or busy individual who can only dedicate time after working hours to trading. Forex allows full-time employees to come home from work and trade during their free time.
In the previous section where we discussed the benefits of the Forex marketplace, we discussed the ability for traders to trade with high leverage (when they borrow money from lending brokers in order to increase investments and therefore increase the rate of profit). However, trading with leverage has its drawbacks.
When we trade with leverage, we generally have large amounts of money on the line, so to speak. When price fluctuations move in a favorable direction, our high leverage comes to our advantage—our investment, quite literally, pays off. When unfavorable—and usually unexpected—price fluctuations occur, however, high leverage puts us in a difficult situation.
To avoid losing high leverage investments when the market takes a turn for the worst, you’ll need to keep a constant eye on prices and price fluctuations. This, of course, can be difficult since I’m sure many of us are busy, working individuals.
There are also various foreign exchange controls currently in place. Some governments across the world have imposed certain restrictions on the selling, purchasing, or trading of foreign currencies. The most common restrictions include:
The selling or purchasing of foreign currencies by a country’s residents.
The selling or purchasing of local currencies by non-residents of a country.
As you consider these disadvantages to Forex trading, however, keep in mind that with a personal trading plan, the correct application of trading strategies, and a critical mind, any trader can drastically reduce Forex trading risks.
The language of the Market
Bull, bear, dividend, index, portfolio, margin—these are just some of the vocabulary words that you should know inside and outside before you enter the stock market.
Bid, ask, option, order, hedge, speculation—these are, again, just some of the vocabulary words that you’ll hear tossed around the stock market and, more specifically, the options trading atmosphere.
Just like the stock market and options trading arena, Forex, too, has its own particular set of financial terminologies that all traders should be both familiar with and understand completely.
I’ll be the first to admit that the simple task of memorizing terms can be quite boring, perhaps even daunting. Flashcard memorization was something we thought we left behind in grade school, maybe even high school, right?
Fortunately, I’m not asking you to whip out those blank index cards, jot down the following terms, and memorize each and every one in great detail. Actually, I just want to introduce a few particular terms and provide a short definition of each one. It’ll be painless, I promise.
But why the emphasis on just the following 6 vocabulary terms? Well, I’ve selected the following words to introduce and discuss for 2 particular reasons.
First and foremost, these are financial terms that you’ll encounter throughout your reading of this book. When you’re not sure about what a particular term means, then understanding the concept itself will be rather difficult.
For example, let’s say I have the sentence: She was abstemious. If you’re familiar with this word already, then you already know a little bit about the woman’s character without needing to have read anything else.
If you’re not familiar with this word, however, then you’ll need to rely on context clues (or look it up in a dictionary) in order to understand what exactly is being said about the woman.
The financial terms in this book work in a similar way—if you aren’t familiar with these particular terms, you’ll find yourself re-reading a lot of the surrounding information over and over again in order to understand what’s being said.
The second reason why I’ve chosen these 6 particular terms is plain and simple: these are the most basic, but also most fundamental and crucial, terms that you’ll hear tossed around while trading on Forex, day in and day out.
Better yet, these are terms that every Forex trader should use, consider, or think about every day. So before I start getting too ahead of myself here, let’s get on to introducing these terms, shall we?
Forex Trading Basics
Forex market involves the trading of currencies from different countries and traders need to learn Forex trading basics for their businesses to be successful, and they should also find out how to implement them.
A Forex trader should always choose a currency pair that is bound to change in its value within a short period, and identify the best marketplace where he or she can effectively trade.
The business can be carried out through a broker or a market maker so that the middleman can pass the order to the relevant partner in the interbank market who will fill your position.
When a person is satisfied with the level of trade that he has engaged in, he can choose to close the deal; the middleman will also close his position immediately in the interbank market. Forex trading basics will help you to engage in a successful business and make reasonable profits.
There are many Forex trading basics, and one of them is the Forex orders. Different types of rules in the Forex market helps businesspersons to control their trades. They control how you enter and how you exit a Forex trade. Market orders are used to open or close a trade at the prevailing market price.
On the other hand, limit orders are used to exit the market in profits. A limit order is often the goal of many traders because significant gains are realized to their account balances.
Stop orders are exits that will close down a dealers business. It closes the trade at a designated level of a loss and can be used to lock in gains at a time when the business is making profits.
Entry orders are used at the time of entering the stock market. Understanding the rules as a part of Forex trading basics, helps you to employ risk management practices and is an essential and fundamental skill for a booming business.
Forex charts are a vital part of Forex because it is considered as a unique science of the trade. Learn how to read the charts because they always seem complicated at first, but with regular lessons, it becomes easier to master the way the charts flow.
The charts are also different depending on the options that a trader uses. For beginners, it is advisable to start learning with easy options as you progress to complex chart options.
Each chart also has different settings, which display the style of the prevailing market price and the type of period that a trader needs to view at a particular time.
The period varies from 1 second to 10 years because of the different chart systems. For a smooth Forex trading, traders and brokers should learn how to read Forex quotes with ease, as they are vital Forex trading basics for a sound business.
The other technical and essential skill are moving averages. This technical indicator helps traders to keep track of the pricing trend of different currencies. "Stop-loss" are also important Forex trading basics and dealers should learn how to use them.
Currency dealing is not an easy business and requires much effort on the part of investors. Often, people it difficult to get along with the reasons for this market that even easy guidelines are unpleasant.
Inappropriate Forex Risk Management Solution is usually the reason why disadvantages and problems come your way. Having an efficient dealing plan and method is sometimes not enough in attaining your goals and neither can a variety of resources raise your transaction account.
One of the typical issues of investors is that they have been keeping on duplicating what errors they have done from their previous dealing encounter.
However, of course, you could never obtain achievements in dealing if you let your feelings intrude your company. Luckily, issues like this could be quickly fixed with just a spread of self-discipline and the right mindset towards the accomplishment of objectives.
However, most investors seemed to be not acquainted with the threats they are taking. Also, because of that, they don't succeed to perform appropriate currency trading risk control to be able to fix the coming up issue.
Risk Management Solution is effective only if you know how much you are willing to treat while supposing for how much earnings you will obtain at the end.
Failures and disadvantages are just a cause of too much status on the dropping place. Many investors aren't conscious that the more time they will keep on their dropping business, the greater their threats are and the likelihood of obtaining future economic problems or more intense, bankruptcy.
To better help you with currency dealing with threat control, you also need to know how to determine the risk-reward rate. This way, you have a concept of the variations between how much you are going to generate as well as the aspect of your financial commitment you are going to reduce.
With this understanding, you are well knowledgeable of the potential results of your company as well as help you in developing your activity programs. Moreover, establishing a stop-loss is also valuable.
Not only it identifies restrict of your approved reduction, but it also stops further harm to your other sources and financial commitment strategies. There are still a lot of methods on how to better enhance your earnings and change the threats you are getting. You just have to be accountable enough to look for other indicates of attaining your objectives.
Intellect alone is not enough to be able to obtain achievements but being sensitive to deal with each challenging scenario and having a successful technique could be the key to having a well-rewarded dealing result.
If organizations are looking for exposure to handling cash, assets, financial threat, protect bookkeeping and conformity all through a single remedy; they are looking for features that define a Treasury and Risk Control (TRM) remedy.
These days, when industries modify is instant and regulating modifies reacts in kind, smooth information, and fast time-to-market is critical. Software-as-a-Service (SaaS) can provide.
A TRM remedy that controls the reasoning abilities exposure within a company so that they can function and content in the new world.
What makes an F1 racing champion? Is it the car? Is it the technology that went into building the engines? No, it is the driver.
The driver's confidence around corners and patience in the face of a daunting challenge by other drivers makes a champion. Similarly, the trader makes the difference in stock and options trading.
It is the stock or options traders' confidence in their chosen methodology and their patience in the face of daunting price changes that makes a champion stock or options trader.
Trading Confidence and Trading Discipline are the most important aspects of trading psychology that make millionaire stock or options brokers. They are also the main motive why so many stocks and options traders fail and break their bank.
Trading Psychology -Trading Assurance
Trading trust is a mental confidence banking account in every trader, and trading discipline determines if you deposit or withdraw from it.
Trading confidence is what enables every stock and options traders to execute trades according to their chosen methodology confidently and to stick to the game despite losses knowing that they will eventually make more wins than losses.
Trading confidence is a banking account, which you can either deposit to or withdraw from. Each time you lose money, you pull out from your trading confidence and each time you make money, you deposit to your trading confidence.
When your trading trust is zero or bankrupt, you will find yourself hesitating before every trade while imagining the pain if the trade turns out a loser again.
You will have sleepless nights and will rush out of trades at the very first sign of danger, making unnecessary losses. When that happens, it is the time to go back to paper and re-examine the way you have been trading.
In fact, you do not have to break your trading account balance to have your trading confidence bankrupt and a bankrupt trading trust always lead to a bankrupt trading account.
Conversely, every time you win money with your chosen methodology, you deposit to your trading confidence bank, feel confident and joyful when placing trades and do not panic when trades go wrong.
Trading Psychology - Factors Affecting Trading Confidence:
A major determinant of your level of trading confidence is the amount and nature of money that you have to trade with. The more money you can afford to lose, the higher your initial level of trading confidence.
Stock and options traders who can afford to lose only very little money would usually have a very low level of trading confidence as every loss takes a significant bite out of their trading confidence bank.
Again, you need not lose all your money to lose all your trading confidence. Some stock and options traders no longer feel confident enough to trade when their account go down by 30%, while some reach that level of confidence bankrupt only when their account go down by 70%.
The nature of money you have to trade with also determines your starting trading confidence. If you were trading with excess money, which you do not need, then your level of trading confidence would be very high. In fact, your trading confidence could still be high even if you lose all that money.
Conversely, if you were trading with borrowed money, which you need to pay back in installment, and with interest, your trading confidence would be extremely low as every loss makes it harder for you to pay the money back.
Alas, there is no objective and empirical method of calculating your level of trading confidence and most stock and options traders only understand it when it goes bankrupt.
At this point, it is clear that you need to win money to build up a strong trading confidence banking account and to win money; you need to follow a proven and successful trading methodology. A losing method will bankrupt your trading trust in no time no matter how much you start out with.
Trading Psychology -Trading Discipline:
Once you are sure that you have a proven and successful method like my Star Trading System, you will need Trading Discipline to make sure you stick to the rules and trade only when entry requirements are fully met.
Without trading discipline, you will end up spoiling any successful methodology, leading to a withdrawal of your trading confidence.
Every trading methodology trades only when specific setups or rules are met. Without trading discipline, you will not have the patience to wait for such setups or rules to be fully met before trading and every time you break the rules, you increase your odds of losing and every loss withdraws from your trading confidence.
Therefore, do not make "fun" or "experimental" trades by compromising rules as losing under such conditions do withdraw from your trading confidence as well.
Trading Confidence & Complacence:
A distinction must be made here regarding trading confidence and complacency. Complacency comes not from high trading confidence but a complete lack of trading discipline. Complacency always leads to a quick and complete bankrupt of trading confidence, so, be certain to understand the difference.
Finally, the relationship between trading confidence and trading discipline goes both ways.
A strong trading discipline following a proven methodology builds strong trading confidence and strong trading confidence encourages the development of active trading discipline as you experience the success coming from following rules.
Only when you have both strong trading confidence and trading discipline will you have the trading psychology needed to make millions.
If you have any experience of Forex trading, you will probably have heard the three common beliefs mentioned in this article. However, it should be pointed out that, despite popular belief, they are complete myths and are false.
The first of these relates to learning how to trade Forex. It's often pointed out by so-called experts that one of the best ways to learn how to trade is to place paper trades for a certain length of time.
In other words, you write down the deals you would have theoretically made if you were trading a live account. To me, this is utterly pointless because anyone can do this, and it doesn't teach you anything about Forex trading because nothing is at stake.
A much better option is to read as much as you can and learn from experienced Forex traders before developing your Forex trading system. Then start trading a live account but with very small stakes.
This way there is emotion involved if you place a losing trade, even if it is only small stakes, so this motivates and pressurizes you into finely tuning your system so that the next trade is a winning one and the system becomes profitable overall.
The second misconception is that Forex trading is easy. You will often see this statement made on sales pages when someone is trying to sell you their 'amazing' system. However, as an experienced trader myself, let me assure you that trading Forex is anything but easy.
Indeed this is borne out by the fact that only a tiny minority of people who try their hand at this potentially rewarding occupation make any money. It's a sad fact that most people will end up blowing their bankroll and quitting trading altogether, so it's certainly not easy.
The final misconception is that if you want to make the big money, then you have to be in front of your computer screen all day long to trade a lot of positions.
This is false because if you switch to more extended periods, you can capture far bigger price moves. Also, it's a lot less stressful and far easier to make profits this way because technical analysis is so much more reliable on the longer time frames.
So if you ever hear someone come out with any of these statements, please ignore them because they are talking complete nonsense.
The 6 Terms Every Trader Should Know
The following is a list of Forex terminologies that you’ll want to be familiar with and understand fully, at least on a basic level. These are terms that
1.) you’ll encounter during your trading endeavors, or 2.) you’ll need to consider when making knowledgeable investment pursuits.
Keep in mind as you read through these definitions that we’ll be discussing several of these terms in greater detail in the following book. For now, you simply want to gather a basic understanding for each term—this will make the following conversations in later chapters easier to follow.
Forwards: A forward is a type of contract that is created between two parties, two traders seeking to exchange currency. It’s also a way to confront and deal with the risks that come with foreign exchange (changing market rates).
A pre-established date is settled upon by both buyer and seller, and an exact exchange rate for that particular day of trade is settled upon in advance.
Futures: This is very similar to a forward, except that the pre-established date of trade and the exchange rate is not settled upon by the buying and selling parties—dates of trade and exchange rates are standardized. Hence, futures contracts are oftentimes referred to as standardized forward contracts.
Option: The owner of currency has the right, but not the obligation, to exchange one currency for another by pre-established expiration date and with a pre-determined exchange rate. The seller of currency, however, is obligated to follow through with the exchange if the trade expiration date and the exchange rate has been established.
Speculation: Conducting a financial transaction that has a high loss-risk, in hopes of generating a substantial profit in return. For speculators, the possibility of generating huge gains outweighs the risk of losing investments.
Speculation does not use mathematical formulas or analytical software. Instead, speculation involves reviewing a security’s financial past, identifying trends and patterns, and making educated assumptions about the security’s future movements.
Spot: A currency exchange when a selling party delivers a previously agreed upon amount of currency to a buying party, and receives a previously agreed upon amount of currency back from the buying party.
Exchange rates are agreed upon by both parties before the start of a transaction. This is considered a direct exchange between two parties because cash is exchanged rather than a contract (as we saw with forwards and futures).
Swap: This is a type of forwarding transaction. Two parties exchange currencies for a pre-established length of time and agree to reverse the transaction on a pre-determined, later date. Deposits are generally required for swaps as a means to hold positions open until the exchange is complete.
If you’ve gotten this far, congratulations. These terms can oftentimes appear dense to the beginner trader, and they might even seem pretty similar, maybe even too similar. That is, some of these terms can be hard to differentiate from one another.
As we prepare to move forward with our discussion, however, you might want to conduct a quick self-assessment. Without looking back at the definitions you just learned, test yourself.
Specifically, ask yourself what the definitions for a spot, forwards, and futures were. You’re invited to record your answers in the spaces provided below. Check your answers against the above definitions once you’re finished.
Why have I asked you to redefine these three words, specifically?
You’ll need to understand the basics of these terms before moving forward. Don’t worry if you don’t understand them fully quite yet —we’ll explore the more detailed characteristics of each marketplace in the following book.
All I ask is that you feel comfortable with the information you’ve been provided in this book before moving on.
Strategies for Part-time Traders
Unlike many areas of the stock market, the Forex marketplace is an excellent financial environment for those who plan to pursue trading endeavors either full-time or part-time.
Usually, the financial marketplace requires a great deal of time, patience, practice, analysis of charts and tables, and careful observation of a security’s every minor fluctuation and major movement.
This can be a time-consuming process that requires a trader’s complete attention for the entirety of the stock market’s 8-hour open span.
Therefore, the traders who participate in the stock market must be those who are able to dedicate large amounts of their time to stock analysis, interpretation, critical thinking, and thoughtful decision-making.
In other words, the attention-demanding nature of the stock market limits the number of individuals who can participate.
Certain approaches to the Forex marketplace, however, allow both full-time and part-time traders to successfully trade and generate a substantial profit.
Different approaches and exchange strategies should be used depending upon the amount of time an individual can dedicate to pursuing currency exchanges, but it is entirely possible for a part-time trader to find the same degree of success as the full-time trader. This book will introduce how this is done.
Researching, interviewing, selecting, and using a broker or brokerage during your time trading in the Forex marketplace is crucial, especially for the part-time trader.
We won’t be going too far into the details of opening a brokerage account in this book, but you should know just how important a broker is in your situation.
You’ll need to spend a few minutes filling out an application, and you’ll need to pay a relatively large application fee (sometimes up to $2,000), but I assure you, if you trade correctly and efficiently on the Forex market, this upfront time investment and monetary investment will pay off rather quickly.
Think of it this way: a broker is just another person on your side—he or she is able to help you handle your financial situations and endeavors when you’re personally not able to.
As you work toward finding and choosing a reliable broker or brokerage you trust, keep these following questions in mind, and work them into your meetings with each broker.
They’re simple questions, but they’ll tell you a great deal about your broker’s interests, experience, services offered, and commitment to helping you personally:
How long have you been with this brokerage?
How many brokerage offices are you affiliated with?
How many clients are you currently working with? Do you have a cap?
How many clients have you worked with in total since you started?
Do you have past client testimonials that I can review?
What services do you offer?
How will you personally help me and my unique financial situation?
Why should I choose you?
You’ll need a broker or trading software in order to create stop-loss orders, which begins to prove my point about finding a broker. Nonetheless, for those who aren’t familiar with what it is, a stop-loss order is, first and foremost, an order that you place with your broker.
This order remains on file and tells your broker when to automatically pursue an exchange once a currency pairing reaches a predetermined point. You’ll have the freedom to decide what this point is on your own or during a personal consultation with your broker. Here’s a helpful breakdown:
Stop: When a predetermined currency pairing with an ideal, pre-established exchange rate is reached, your broker automatically buys or sells.
Limit: this is when the trader (you) sets a minimum and maximum price that determines when your broker buys and sells.
Both of these features are helpful because they make it so that you can exit positions before a loss occurs, or enter positions when profit is expected to occur. The best part?
Setting up stop-loss orders with your broker means you don’t always need to keep a constant eye on how currencies are doing. Your investments are protected, even when you’re not able to pay attention.
Because the part-time trader isn’t able to keep a constant eye on currency movements and changes in currency values, pursuing currencies with short-term trend histories isn’t a good idea—if things change quickly, you might not be able to act accordingly.
Because of this, you’ll want to avoid looking at charts that detail a currency’s hourly movements.
Instead, look at charts and other data resources that note and analysis how a currency does over the course of weeks, even months. Looking at long-term trends means you’ll have a general idea about what kind of position a currency might be in later on in the week or months down the road.
Start by looking at the basics: are there uptrends every couple of days or around certain events? What are those events? Are similar events expected to occur again? Are there downtrends every couple of days or around certain events? Again, what are those events, and are similar events expected to occur again anytime soon?
It’s a rather rudimentary strategy in the grand scheme of things, but setting up finance-related notifications and alerts on electronic devices is a great strategy for the part-time Forex trader to pursue.
I’d recommend Bloomberg, which is a free mobile application available to both Android and iOS users. Set up daily alerts that are delivered to your phone in the palm of your hand. Gain access to breaking the financial news. Browse through a wide array of financial charts and tables.
Follow currencies, currency pairings, and get actual currency quotes. Simply downloading a finance application seems like a minor task, and it certainly is, but it’ll absolutely keep you in the financial loop at all times.
And sometimes, being in the financial loop is sometimes all the part-time Forex trader needs in order to make smart financial decisions, pursue advantageous currency pairings, and generate substantial daily profit.
If you’re looking for additional news resources or are interested in receiving incredibly helpful financial updates, be sure to get your hands on something called Forex signals.
These “signals” are alerts provided by experienced traders, financial experts, or financial analysts that are delivered right to your email, mobile phone, or trading platform (software).
For a small fee, you’ll be able to set up where these alerts are delivered to in order to ensure that you’re constantly in the loop (yes, even your computer at work).
Notifications will be sent regarding a wide range of finance-related topics and breaking-news stories, but you’ll also have access to tested and proven trading strategies and financial advice from financial experts and professionals.
Strategies for Full-time Traders
Unlike the part-time Forex trader, the full-time Forex trader is someone who is able to dedicate large amounts of his or her time to seeking rewarding currency exchange opportunities and pursuing advantageous currency exchange endeavors. Essentially, the limitations a part-time trader might encounter are rendered void.
For the full-time Forex trader, the spot, forwards, or futures marketplace is a financial arena in which the possibilities are endless and profit generation is entirely feasible.
In the previous book, many of the trading strategies that we discussed revolved around focusing on long-term currency exchange endeavors as a means to avoid falling victim to and experiencing monetary loss when sudden currency and market changes occur.
However, and fortunately for the full-time trader, both long-term and short-term trading strategies are strategical possibilities. Essentially, you’re in a great position because you’re able to choose which strategies you wish to adopt, and brush aside the strategies you don’t care much about.
If you downloaded a financial news app on a mobile device, you’ll find that many apps offer trading strategies themselves. Take advantage of these strategies and features—review them, understand how they work, and considering incorporating them into your strategic planning and decision-making.
In the meantime, however, I’ve also included three full-time Forex trading strategies that I’ve personally found the most success with while trading Forex.
The strategy of risk aversion is exactly what it sounds like—it’s a strategy that ensures a trader’s risk of loss is avoided. This technique is great because it’s rather simple to do, but it’s also incredibly helpful and reliable.
Full-time Forex traders will be able to dedicate large amounts of their time to observing currency movements, analyzing trends and patterns, and making informed decisions about which currency exchanges to pursue.
The time you dedicate to trading on Forex means you’ll become familiar with rewarding currency pairings and know those currency pairing’s quotes and exchange rates. You’ll also know when those pairings and exchange rates start to go sour. This is when you’d employ the risk aversion strategy.
Here’s how it works:
When currency pairings, bids and asks, and exchange and interest rates start to take an unfavorable turn (perhaps because of a current political tension in a country), you’ll need to take notice and act upon these unfavorable movements before a monetary loss occurs and risk accumulates.
To do so, you’ll need to liquidate your position or positions in risky assets, while also shifting your funds and investments to less risky currency pairings that have more favorable exchange and interest rates.
The transition from risky to less risky currency pairings should be quick and smooth, so it’s best to have a few backup currency pairings in mind before such events occur. This means doing research beforehand on other advantageous and profit-generating currency pairings and their trends.
I’ve actually mentioned carry trading before in an earlier chapter, but we didn’t really spend too much time with it. Now, however, we will.
If you recall, I mentioned carrying trading during our discussion about the Japanese yen and how the yen has become the powerful global currency it is today.
In case you’ve forgotten, the Japanese yen was once quite an alluring currency because of its once incredibly low-interest rates, which drove massive influxes of currency traders towards it.
With such low interest rates, traders would purchase the Japanese yen, then exchange it for much higher-yielding currency, securing an oftentimes substantial profit in the process. This buy low, sell high technique is known as carrying trading.
But how does one profit from doing this? Well, remember: the larger the difference in interest rates, the more profitable for the trader, generally speaking, of course.
If you do decide to pursue this strategy, just be wary of the market’s fluctuations and sudden movements. A single political, cultural, religious, etc. tension in a country can have a sudden and rather large effect on the value, exchange rate, and interest rate of a country’s currency.
Always keep an eye on a country’s current events and news, and always stay up-to-date on a currency’s movements, trends, and daily fluctuations, both minor and major.
The strategy of speculation is used across almost all financial and investing endeavors. Investors of stocks and bonds use speculation. Options traders use speculation. Forex traders, too, use speculation.
If you’re not familiar with what speculation is, it’s a trading technique that uses educated estimations—speculations—about the future direction that currency will take. A speculator might make educated presumptions about the valuation of a currency pairing in a few weeks.
He might speculate about the exchange rate between USD and AUD after a major event has happened in Australia. Whatever the trader uses Forex speculation for, he or she is doing so in order to determine which currency and currency pairing will be the most favorable and rewarding exchanges to pursue.
While there’s no mathematical formula or algorithm that is used for the speculation strategy, it’s not entirely guess-work, either. A trader who employs the strategy of speculation will need to spend a great deal of his or her time analyzing the data of particular currency pairings.
You’ll need to focus your attention on looking at a currency pairing’s past history and any past trends and patterns that can be analyzed and further examined. Doing so gives you a better, more educated understanding of how a currency pairing has reacted to particular events in the past, and how it might react to particular events in the future.