Saturday, September 6, 2008

Why Forex?

Why FOREX? Forex. The mainstream business, the biggest market on earth today. It has a daily turnover of more than 2.5 trillion US$ (more than 100 times greater than NASDAQ), and it's still growing.

The participants are banks, business organizations - large and small, and obviously many private individuals. Everyone on earth today can immediately start trading Forex online, from any computer, anytime, using their credit cards. The FOREIGN EXCHANGE (FOREX, FX) market is not a "market" in the traditional sense. In fact, it is the nearest to "perfect market" from economics perspective. There is no centralized location for trading as there is in futures or stocks. Trading occurs around the clock over the telephone and on computer terminals at thousands of locations worldwide.

Foreign Exchange is also the world's largest and deepest market. Daily market turnover has skyrocketed from approximately 5 billion USD in 1977, to a staggering 2.5 trillion (and more) US dollars today. This is more than 100 times the daily turnover of the NASDAQ. Most foreign exchange activity consists of the spot business between the US dollar and the six major currencies (Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar). The FOREX market is so large, and is hosting so many participants, that no single player, governments included, can directly control or make any significant influence over the direction of the market.

That makes the FOREX market the most exciting market in the world. Central banks, commercial banks, international corporations, money managers, speculators, and private individuals - all involve in FOREX trading. Foreign exchange (FOREX) is the trading of contracts of currency pair exchange rate. It is a NON-DELIVERY trade, which means that there is no physical transaction of currencies, but it is rather an agreement, or "contract" (FOREX DEAL), to trade specific volume of a pair of currencies at an agreed exchange rate. The magnitude of such FOREX trade is that, in order to make the deal, only a proportional amount is needed (the COLLATERAL, or the MARGIN). Thus, if the currency pair exchange rate has changed by some percentage, the value of the MARGIN invested would accordingly change, however - in a much higher proportion. In fact, the actual change onto the Forex trader's investment (the MARGIN they deposited), will be the nominal change occurred to the exchange rate, multiplied by the MARGIN ratio (the leverage). For example: a FOREX DAY-TRADING deal has been made, for buying EUR100,000 against USD, on an exchange rate of 1.3500. The MARGIN required for this deal (offered by the FOREX Trading Platform) is of a ratio of around 1:100. Accordingly, the trader invests only USD100. After a few hours, the exchange rate went up to 1.3620. This is an increase of 0.89%, quite normal for the global Forex market. However, thanks to the MARGIN ratio, the trader's investment went up by 89% (since a leverage of 1:100 has been used)!! Remember: that happened in less than a day!

Same could happen in the opposite direction, however - the traders cannot lose more than their original MARGIN deposited. When the rate goes against the trader's favor, the deal closes automatically ("Stop-Loss") when the margin does not cover anymore the contract's decrease in value. Note that the Forex trader may choose any direction for his deal (for example: either to BUY-EUR or to SELL-EUR in a EUR-USD deal), and still do that with his account base currency (the currency with which he operates his trading account). Hence, he may still profit (in case he was right...) even when the EUR goes down. The Forex market offers today FOREX trading not only in MAJORS (the leading world currencies) but also in many other currency pairs (including exotic, gold and silver, etc.).

Sunday, August 31, 2008

Five Characteristics of the Prosperous Forex Trader

Trading on the foreign exchange market can be extremely profitable, but is admittedly not for everyone. In order to be prosperous in the forex market experts have identified five essential characteristics that the trader should possess.

The first characteristic of a successful investor in the foreign exchange market is the ability to accept risk. The forex is extremely risky. It has a high leverage ratio. This ratio is defined as the comparison of debt to equity. A leverage ratio of 400 would not be out of the ordinary in the foreign exchange market, compared to an average leverage ratio of 2 in the equity markets. Keep in mind that while this ratio indicates a higher potential profit, it can also make the potential loss more significant.

Secondly, successful traders should be confident. They should be convinced of their own ability to execute successful trades on the forex. One of the best ways to guarantee this level of confidence is to take the time and effort to research the market and how it operates. This means knowing the terminology and characteristics that make the market what it is. Beginners have many options on how they can increase their levels of awareness about crossing currency, and their overall confidence levels. They can go through a financial institution or knowledgeable broker. In addition, new traders can learn how to trade on the forex by using free tutorials available on many websites. The Internet is a great way to get trading practice using the complimentary demonstrations available online. It is a good idea to take advantage of these free services before actually opening an account and making a trade. Mini accounts are also available. These allow you to get your feet wet with smaller initial investments than a regular account would. Keep in mind that the forex has great potential to be profitable if you have an idea of how it works.

The third characteristic of a prosperous trader in the foreign exchange market is patience. A successful investor realizes that they may have to accept small losses in order to obtain profits in the long run. It's important to understand that Forex trading, like any business venture, will have its peaks and slumps.

The fourth is you should be prepared to stick to your system despite these fluctuations to maximize profits in the long run. Having patience will help investors stay loyal to the plan they've developed without deterring because of normal ups and downs. A successful trader will also be extremely disciplined. Because the foreign exchange market never closes, opportunities can present themselves at odd hours of the day or night. A forex investor must possess the discipline it takes to constantly monitor currency charts, current events and leading economic indicators. They also must maintain high levels of discipline to avoid deviating from their system. They will stick by their strategy despite minor market changes.

The fifth characteristic that experts agree that a prosperous forex trader must possess is the ability to know when to exit the market. Investors that stay in the market too long can see their profits dwindle rapidly. If your market indicators and signal service demonstrates that it is time to exit the market you should do so. Remaining in the market despite signs warning you to exit is usually motivated by greed or ignorance, and will usually result in a financial loss. While the foreign exchange market draws many investors because of it unique attributes and numerous benefits it does not suit everyone. In order to be successful in the forex it is important that you meet all of the above characteristics. By