1. Learn how to trade Forex
Nope, reading a few articles online or browsing every page in www.golearnforex.net is not what we call learning Forex trading.
To win and maximize your profits in foreign currency exchange market you definitely need to do more than that! Attend seminars and trading courses organized by professionals. Learn from the experience and form your network with other FX traders to exchange information and latest trading strategies.
A good place to start with is to register yourself in Peter Bain's Forex trading course.
2. Paper trade Forex in demo account
Start your Forex trading with 'play-money'!
Many FX noobs go into the Forex market too soon and lose a lot of money due to margin trading. The best way to learn Forex, traders are always encouraged test their skills first and to build up their confidence level with demo account before committing their own capital. Register a Forex account here with FinoTec .
3. Maximize your FX trading tools and systems.
Forex trading
It is very important for Forex traders to know their trading tools well. Various FX brokers offers an array of tools that are used for trading the Forex markets.
Practically, traders often use one or more than one trading system/software to trade Forex online. These software are often come in a package when you open an account with Forex brokers.
In brief, this is how this software works: The Forex trading software is connected to the broker’s system via Internet, currency prices are updated live, and you make your call on trade via the software.
Such trading software often requires minimum computer powers thus it can be run on most home computers nowadays as long as it is connected to the Internet.
Recommended Forex trading software
DashBoard FX is one of the best trading software you can have online. It provides real-time FX currency signals, trade alerts, as well as a well-designed FX trading software (DashBoard FX).
4. Selecting a Forex broker
There are many Forex brokers to choose from, just as in any other market. When you are browsing for Forex, ask questions below:
* Does the FX broker offers low spread value?
* Is the FX broker registered with related authorizations such as FCM?
* What kind of tools does the FX broker provides?
* What kind of margin options are there?
* Does the FX broker provides live customer supports?
* Does the FX broker offers demo account for beginner traders?
* If you do not have sufficient capital, check whether the FX broker offers mini account that requires low startup funds.
Asking questions above will help you in choosing the right Forex broker. For entry level, we suggest our users to start Forex trading with FinoTec. Click here to visit their official website and check out their deals.
5. Avoid Forex trader's common mistakes.
Avoid trading with your emotions, avoid over trading your account, avoid over-staying at your positions, avoid bad money management, avoid risking what you cannot afford in Forex trading ...Forex trading involved a lot of risks and traders are always advise to trade and learn in the same time.
Get aware of common mistakes done by most Forex traders and set your own rules during trading in FX market. Trade with discipline and always prepare to learn new concepts from others.
For more Forex trading tips, we suggest this article: 10 Tips for your success in Forex trading
6. Keep investing in your trading education.
We just cannot resists to keep stressing that investment education is always the most crucial things in starting your trade in Forex market. If you are new to Forex trading; learn, get hands-on experience and read as much FX books as you can to educate yourself regarding FX market.
Wednesday, July 22, 2009
Technical analysis in Forex trading
What is Technical Analysis?
Technical Analysis is an effort to forecast price movements by analyzing market data such as historical price trends, volumes, open interest, etc. Technical analysis is conducted based on the principal of 'history repeats itself', it does not result in absolute predictions about the future.
Instead, indicators generated by technical analysis will help investors anticipate what is "likely" to happen to prices over time.
Ever heard of Japanese candle stick? Fibonacci numbers? Relative Strength Index? Moving averages? Pivot points? Elliot Wave? These are some of the charting method that FX traders like to use during trades.
Technical Indicators in Forex
Unlike fundamentals, technical trading relies heavily on graphs and charts. Practically, a technical trader will need at least one charting software to read and plot the related charts for his own references.
As in our case, we will include some common technical indicators in Forex trading as well as its brief explanations. Charts and graph examples will be provided from time to time for the usage of learning.
* Simple Moving Average (SMA)
* Relative Strength Index (RSI)
* Moving Average Convergence/Divergemce (MACD)
* Parabolic SAR
* Fibonacci Numbers
List of major technical indicators in trading.
Limitations on Technical Tradings
Technical analysis looks secure with proven tracks in the past times, however, trading Forex purely based on Technical Indicators would be extremely unsafe as we all knew thatt 'future does not equal to the past'.
A lot of unexpected variables are not considered in Technical Analysis: change of country leaders, change of government, natural disasters, change of bank policies, investor’s mood, war, or even terrorism attacks migh affect the currency value dramatically. These incidents are most likely not happening in the past thus Technical Analysis is not effective enough to predict the price movement.
Trading Forex Purely Based on Technical Analysis
A combined of two approaches (Fundamental and Technical) is always encourage to get the optimum plots on your investment plan. Read about Fundamental Analysis in Forex trading here.
Technical Analysis is an effort to forecast price movements by analyzing market data such as historical price trends, volumes, open interest, etc. Technical analysis is conducted based on the principal of 'history repeats itself', it does not result in absolute predictions about the future.
Instead, indicators generated by technical analysis will help investors anticipate what is "likely" to happen to prices over time.
Ever heard of Japanese candle stick? Fibonacci numbers? Relative Strength Index? Moving averages? Pivot points? Elliot Wave? These are some of the charting method that FX traders like to use during trades.
Technical Indicators in Forex
Unlike fundamentals, technical trading relies heavily on graphs and charts. Practically, a technical trader will need at least one charting software to read and plot the related charts for his own references.
As in our case, we will include some common technical indicators in Forex trading as well as its brief explanations. Charts and graph examples will be provided from time to time for the usage of learning.
* Simple Moving Average (SMA)
* Relative Strength Index (RSI)
* Moving Average Convergence/Divergemce (MACD)
* Parabolic SAR
* Fibonacci Numbers
List of major technical indicators in trading.
Limitations on Technical Tradings
Technical analysis looks secure with proven tracks in the past times, however, trading Forex purely based on Technical Indicators would be extremely unsafe as we all knew thatt 'future does not equal to the past'.
A lot of unexpected variables are not considered in Technical Analysis: change of country leaders, change of government, natural disasters, change of bank policies, investor’s mood, war, or even terrorism attacks migh affect the currency value dramatically. These incidents are most likely not happening in the past thus Technical Analysis is not effective enough to predict the price movement.
Trading Forex Purely Based on Technical Analysis
A combined of two approaches (Fundamental and Technical) is always encourage to get the optimum plots on your investment plan. Read about Fundamental Analysis in Forex trading here.
Fundamental analysis in Forex trading
Fundamental analysis, in short, is referring to the dynamic studies of distinct plans, erratic behaviors and unforeseen events that influence the economic of certain entity.
The focus of fundamental analysis mainly lies on the political, social, and economic force that drives the supply/demand trends the currency. Government policies, bank policies, natural disasters, social stability, overall economic trends are some of the major factors that draw a fundamentalist’s attention.
Fundamental analysis comes very handy in making mid-long term invesment decisions. However as the analysis method is mainly focus on the major thing, it will not be a good tool for Forex day traders.
It is easy to understand that fundamental skills are useful in forecatsing currency overall trends but in term of detailing job, technical analysis seems to be more appropriate.
Economy Indicators
Fundamental analysis involve a lot of analysis on the macroeconomic situation.
Thus, economy indicators of the country such as GDP growth rates, unemployment rates, retail sales, and interest rate are used heavily in when valuating a country's currency. Some of the frequent used economy indicators in Forex trading are as below (Click in each for detail explanations):
World map
* The Gross Domestic Product (GDP)
* Retail Sales
* Interest Rates
* Unemployment Rate
Besides those listed above, other fundamental factors used to analysis the currency strength include Industrial Production Reports, Consumer Price Index (CPI), Manufacturing PMI-ISM, and Manufacturing Production. We will cover each of these indicators from time to time.
How are indicators used in Forex fundamentals trading?
A country's economic situation refelects directly onto the currecny trading world. Hence, it is important for a Forex traders to keep an close eye on the financial clalender release by it country itself or private sectors. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency's price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency's valuation.
Also, it is recommended to study the fundamental aspects of several country whenever trading in the forex market. For those countries that have strong political/economical connection, currencies value flux hand-in-hand. Thus researching a few countru in a trade is necessary.
Some useful tips when implementing fundamentals analysis in Forex trading are:*
* Economic calendar: When and where. Currency values response sharply to certain release of economy indicators. Keep an close eyes on the currency price trend whenver there is a release on related economy indicators.
* Be informed about the economic indicators that are capturing most of the market's attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.
* Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.
*References from http://www.investopedia.com/articles/trading/04/031704.asp
From Fundamentals to Technicals in FX Market
Pure fundamental trading is very problematics. Without a doubt the analysis is very effective in predicting the overall economic condition and the market behavior.
Technical analysis
It gives clear picture on general economy health of certain entity (a country in case of Forex) and shows how economy situation become what it is now as well as predicting the overall economic growth trend in the future.
However, information obtained thru fundamental studies often fails to signify short term fluctuation in Forex market. Thus, it is wise to apply precise techniques to convert fundamental study’s results into accurate entry/exit price indicators.
The focus of fundamental analysis mainly lies on the political, social, and economic force that drives the supply/demand trends the currency. Government policies, bank policies, natural disasters, social stability, overall economic trends are some of the major factors that draw a fundamentalist’s attention.
Fundamental analysis comes very handy in making mid-long term invesment decisions. However as the analysis method is mainly focus on the major thing, it will not be a good tool for Forex day traders.
It is easy to understand that fundamental skills are useful in forecatsing currency overall trends but in term of detailing job, technical analysis seems to be more appropriate.
Economy Indicators
Fundamental analysis involve a lot of analysis on the macroeconomic situation.
Thus, economy indicators of the country such as GDP growth rates, unemployment rates, retail sales, and interest rate are used heavily in when valuating a country's currency. Some of the frequent used economy indicators in Forex trading are as below (Click in each for detail explanations):
World map
* The Gross Domestic Product (GDP)
* Retail Sales
* Interest Rates
* Unemployment Rate
Besides those listed above, other fundamental factors used to analysis the currency strength include Industrial Production Reports, Consumer Price Index (CPI), Manufacturing PMI-ISM, and Manufacturing Production. We will cover each of these indicators from time to time.
How are indicators used in Forex fundamentals trading?
A country's economic situation refelects directly onto the currecny trading world. Hence, it is important for a Forex traders to keep an close eye on the financial clalender release by it country itself or private sectors. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency's price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency's valuation.
Also, it is recommended to study the fundamental aspects of several country whenever trading in the forex market. For those countries that have strong political/economical connection, currencies value flux hand-in-hand. Thus researching a few countru in a trade is necessary.
Some useful tips when implementing fundamentals analysis in Forex trading are:*
* Economic calendar: When and where. Currency values response sharply to certain release of economy indicators. Keep an close eyes on the currency price trend whenver there is a release on related economy indicators.
* Be informed about the economic indicators that are capturing most of the market's attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.
* Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.
*References from http://www.investopedia.com/articles/trading/04/031704.asp
From Fundamentals to Technicals in FX Market
Pure fundamental trading is very problematics. Without a doubt the analysis is very effective in predicting the overall economic condition and the market behavior.
Technical analysis
It gives clear picture on general economy health of certain entity (a country in case of Forex) and shows how economy situation become what it is now as well as predicting the overall economic growth trend in the future.
However, information obtained thru fundamental studies often fails to signify short term fluctuation in Forex market. Thus, it is wise to apply precise techniques to convert fundamental study’s results into accurate entry/exit price indicators.
Major Currencies Traded in Forex Market
The most traded currency in Forex market (the major seven) are United States dollar, Eurozone Euro , Japanese Yen , British Pound Sterling, Swiss Franc, Australian dollar , and Canadian Dollars.
Forex market is much USD-centered, where United States currency is involved in more than 80% of the trades. Major traded pairs in FX market are EUR/USD, which yields 28% from total trades. USD/JPY and GBP/USD come second and third, with take up 17% and 14% from the global forex trading respectively.
United States Dollar (USD)
The U.S. dollar uses the decimal system, consisting of 100 (equal) cents (symbol ¢).
United States Dollar
In another division, there are 1,000 mills or ten dimes to a dollar; additionally, the term eagle was used in the Coinage Act of 1792 for the denomination of ten dollars, and subsequently was used in naming gold coins. In the second half of the 19th century there were occasional discussions of creating a $50 gold coin, which was referred to as a "Half Union," thus implying a denomination of 1 Union = $100.
However, only cents are in everyday use as divisions of the dollar; "dime" is used solely as the name of the coin with the value of 10¢, while "eagle" and "mill" are largely unknown to the general public, though mills are sometimes used in matters of tax levies and gasoline prices.
When currently issued in circulating form, denominations equal to or less than a dollar are emitted as U.S. coins while denominations equal to or greater than a dollar are emitted as Federal Reserve notes (with the exception of gold, silver and platinum coins valued up to $100 as legal tender, but worth far more as bullion). (Both one-dollar coins and notes are produced today, although the note form is significantly more common.)
In the past, paper money was occasionally issued in denominations less than a dollar (fractional currency) and gold coins were issued for circulation up to the value of 20 dollars.
More details on USD at Wikipedia.
Pound Sterling (GBP)
The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown dependencies.
The slang term "quid" is commonly used in place of "pound(s)". The official full name pound sterling (plural: pounds sterling) is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name.
Pound Sterling (GBP)
The currency name — but not the names of its units — is sometimes abbreviated to just "sterling", particularly in the wholesale financial markets; so "payment accepted in sterling", but never "that costs five sterling". The abbreviations "ster." or "stg." are sometimes used. The term British pound is commonly used in less formal contexts, although it is not an official name of the currency.
The pound was originally the value of one pound Tower weight of sterling silver (hence "pound sterling"). The currency sign is the pound sign, originally ₤ with two cross-bars, then later more commonly £ with a single cross-bar. The pound sign derives from the black-letter "L", from the abbreviation LSD – librae, solidi, denarii – used for the pounds, shillings and pence of the original duodecimal currency system. Libra was the basic Roman unit of weight, which in turn derived from the Latin word for scales or balance.
The ISO 4217 currency code is GBP (Great Britain pound). Occasionally the abbreviation UKP is seen, but this is incorrect. The Crown dependencies use their own (non-ISO) codes. Stocks are often traded in pence, so traders may refer to Pence sterling, GBX (sometimes GBp), when listing stock prices.
More details on GBP at Wikipedia.
Euro (EUR)
Euro (EUR)
The euro (currency sign: €; banking code: EUR) is the official currency of the Eurozone (also known as the Euro Area), which consists of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain, and will extend to include Cyprus and Malta from 1 January 2008.
It is the single currency for more than 317 million Europeans. Including areas using currencies pegged to the euro, the euro directly affects more than 480 million people worldwide.
With more than €610 billion in circulation as of December 2006 (equivalent to US$802 billion at the exchange rates at the time), the euro surpasses the U.S. dollar in terms of combined value of cash in circulation.
While all European Union (EU) member states are eligible to join if they comply with certain monetary requirements, not all EU members have chosen to adopt the currency. All nations that have joined the EU since the 1993 implementation of the Maastricht Treaty have pledged to adopt the euro in due course. Maastricht obliged current members to join the euro; however, the United Kingdom and Denmark negotiated exemptions from that requirement for themselves. Sweden turned down the euro in a 2003 referendum, and has circumvented the requirement to join the euro area by not meeting the membership criteria.
Several small European states (The Vatican, Monaco, and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro, and Kosovo have adopted the euro unilaterally.
More details on EUR at Wikipedia.
Japanese Yen (JPY)
Japanese Yen (JPY) Overview
The yen or en is the currency of Japan. It is also widely used as a reserve currency after the United States dollar, the euro and the pound sterling. The ISO 4217 codes for the yen are JPY and 392. The Latinised symbol is ¥ while in Japanese it is also written with the kanji 円.
While not a usage specific to currency, large quantities of yen are often counted in multiples of 10,000 in the same way as values in the United States are often quoted or rounded off to hundreds or thousands.
The yen was introduced by the Meiji government in 1870 as a system resembling those in Europe. The yen replaced the complex monetary system of the Edo period, based The New Currency Act of 1871 stipulated the adoption of the decimal accounting system of yen, sen, and rin, with the coins being round and cast as in the West.
The yen was legally defined as 0.78 troy ounces (24.26 g) of pure silver, or 1.5 grams of pure gold. The same amount of silver is worth about 1181 modern yen while the same amount of gold is worth about 3572 yen. The Act also moved Japan onto the gold standard. (The sen and the rin were eventually taken out of circulation at the end of 1953.)
Forex market is much USD-centered, where United States currency is involved in more than 80% of the trades. Major traded pairs in FX market are EUR/USD, which yields 28% from total trades. USD/JPY and GBP/USD come second and third, with take up 17% and 14% from the global forex trading respectively.
United States Dollar (USD)
The U.S. dollar uses the decimal system, consisting of 100 (equal) cents (symbol ¢).
United States Dollar
In another division, there are 1,000 mills or ten dimes to a dollar; additionally, the term eagle was used in the Coinage Act of 1792 for the denomination of ten dollars, and subsequently was used in naming gold coins. In the second half of the 19th century there were occasional discussions of creating a $50 gold coin, which was referred to as a "Half Union," thus implying a denomination of 1 Union = $100.
However, only cents are in everyday use as divisions of the dollar; "dime" is used solely as the name of the coin with the value of 10¢, while "eagle" and "mill" are largely unknown to the general public, though mills are sometimes used in matters of tax levies and gasoline prices.
When currently issued in circulating form, denominations equal to or less than a dollar are emitted as U.S. coins while denominations equal to or greater than a dollar are emitted as Federal Reserve notes (with the exception of gold, silver and platinum coins valued up to $100 as legal tender, but worth far more as bullion). (Both one-dollar coins and notes are produced today, although the note form is significantly more common.)
In the past, paper money was occasionally issued in denominations less than a dollar (fractional currency) and gold coins were issued for circulation up to the value of 20 dollars.
More details on USD at Wikipedia.
Pound Sterling (GBP)
The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown dependencies.
The slang term "quid" is commonly used in place of "pound(s)". The official full name pound sterling (plural: pounds sterling) is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name.
Pound Sterling (GBP)
The currency name — but not the names of its units — is sometimes abbreviated to just "sterling", particularly in the wholesale financial markets; so "payment accepted in sterling", but never "that costs five sterling". The abbreviations "ster." or "stg." are sometimes used. The term British pound is commonly used in less formal contexts, although it is not an official name of the currency.
The pound was originally the value of one pound Tower weight of sterling silver (hence "pound sterling"). The currency sign is the pound sign, originally ₤ with two cross-bars, then later more commonly £ with a single cross-bar. The pound sign derives from the black-letter "L", from the abbreviation LSD – librae, solidi, denarii – used for the pounds, shillings and pence of the original duodecimal currency system. Libra was the basic Roman unit of weight, which in turn derived from the Latin word for scales or balance.
The ISO 4217 currency code is GBP (Great Britain pound). Occasionally the abbreviation UKP is seen, but this is incorrect. The Crown dependencies use their own (non-ISO) codes. Stocks are often traded in pence, so traders may refer to Pence sterling, GBX (sometimes GBp), when listing stock prices.
More details on GBP at Wikipedia.
Euro (EUR)
Euro (EUR)
The euro (currency sign: €; banking code: EUR) is the official currency of the Eurozone (also known as the Euro Area), which consists of the European states of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain, and will extend to include Cyprus and Malta from 1 January 2008.
It is the single currency for more than 317 million Europeans. Including areas using currencies pegged to the euro, the euro directly affects more than 480 million people worldwide.
With more than €610 billion in circulation as of December 2006 (equivalent to US$802 billion at the exchange rates at the time), the euro surpasses the U.S. dollar in terms of combined value of cash in circulation.
While all European Union (EU) member states are eligible to join if they comply with certain monetary requirements, not all EU members have chosen to adopt the currency. All nations that have joined the EU since the 1993 implementation of the Maastricht Treaty have pledged to adopt the euro in due course. Maastricht obliged current members to join the euro; however, the United Kingdom and Denmark negotiated exemptions from that requirement for themselves. Sweden turned down the euro in a 2003 referendum, and has circumvented the requirement to join the euro area by not meeting the membership criteria.
Several small European states (The Vatican, Monaco, and San Marino), although not EU members, have adopted the euro due to currency unions with member states. Andorra, Montenegro, and Kosovo have adopted the euro unilaterally.
More details on EUR at Wikipedia.
Japanese Yen (JPY)
Japanese Yen (JPY) Overview
The yen or en is the currency of Japan. It is also widely used as a reserve currency after the United States dollar, the euro and the pound sterling. The ISO 4217 codes for the yen are JPY and 392. The Latinised symbol is ¥ while in Japanese it is also written with the kanji 円.
While not a usage specific to currency, large quantities of yen are often counted in multiples of 10,000 in the same way as values in the United States are often quoted or rounded off to hundreds or thousands.
The yen was introduced by the Meiji government in 1870 as a system resembling those in Europe. The yen replaced the complex monetary system of the Edo period, based The New Currency Act of 1871 stipulated the adoption of the decimal accounting system of yen, sen, and rin, with the coins being round and cast as in the West.
The yen was legally defined as 0.78 troy ounces (24.26 g) of pure silver, or 1.5 grams of pure gold. The same amount of silver is worth about 1181 modern yen while the same amount of gold is worth about 3572 yen. The Act also moved Japan onto the gold standard. (The sen and the rin were eventually taken out of circulation at the end of 1953.)
Leverage Upto 200:1 in Forex Trading
Margin trading refers to the leverage amount given to the traders to trade in the market.
One of the best features in Forex trading is that traders are able to trade foreign currencies with high margin.
You get 1:1 margin for stock exchanges, 2:1 margin for equity trading, 15:1 margin for futures market; but in Forex, normal trade margins are 100:1 and 150:1, or even 200:1 trade margins.
Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.
For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.
The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
Trading Forex in huge margin with allows traders to control a large sum of money with little cash put on the tables. This in turns magnify the ROI dramatically.
Margin Trades and ROI in Forex
Taking $1,000 in a 100:1 margin account as example, you are now granted the purchase power of $100,000.
Say that you execute the trade between USD/JPY: Long Japanese Yen in USD/JPY 109.2 (meaning buying 109.2 Yens with 1 USD) and short JPY at the price of USD/JPY 109.0.
Trading without margin
If you are trading without margin, you have only $1,000 of buying power. The the max you can go is buying (1000 x 109.2) Yens = 109,200 Yens.
Later when you sell off your Japanese Yen in higher price (USD/JPY 109.0), the returns you are getting back is $1001.8.
Profit made in the trade: $1.8
ROI of the trade: 1.8/1000 x 100% = 0.18%
Trading with margin
Now in case you are trading with margin of 100:1, the calculation of the trade will be giving you a total different picture:
Buying Japanese Yen when USD/JPY 109.2:
Long Japanese Yen = (100 x 1000 x 109.2) Yens = 10,920,000 Yens;
Short USD $100,000.Selling of Japanese Yen when USD/JPY 109.0:
Short Japanese Yen = 10,920,000; Long USD = (10,920,000 / 109) = $100,183.5.
Profit made in the trade: $183.5.
ROI of the trade: 183.5/1000 x 100% = 18.35%
One of the best features in Forex trading is that traders are able to trade foreign currencies with high margin.
You get 1:1 margin for stock exchanges, 2:1 margin for equity trading, 15:1 margin for futures market; but in Forex, normal trade margins are 100:1 and 150:1, or even 200:1 trade margins.
Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.
For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.
The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
Trading Forex in huge margin with allows traders to control a large sum of money with little cash put on the tables. This in turns magnify the ROI dramatically.
Margin Trades and ROI in Forex
Taking $1,000 in a 100:1 margin account as example, you are now granted the purchase power of $100,000.
Say that you execute the trade between USD/JPY: Long Japanese Yen in USD/JPY 109.2 (meaning buying 109.2 Yens with 1 USD) and short JPY at the price of USD/JPY 109.0.
Trading without margin
If you are trading without margin, you have only $1,000 of buying power. The the max you can go is buying (1000 x 109.2) Yens = 109,200 Yens.
Later when you sell off your Japanese Yen in higher price (USD/JPY 109.0), the returns you are getting back is $1001.8.
Profit made in the trade: $1.8
ROI of the trade: 1.8/1000 x 100% = 0.18%
Trading with margin
Now in case you are trading with margin of 100:1, the calculation of the trade will be giving you a total different picture:
Buying Japanese Yen when USD/JPY 109.2:
Long Japanese Yen = (100 x 1000 x 109.2) Yens = 10,920,000 Yens;
Short USD $100,000.Selling of Japanese Yen when USD/JPY 109.0:
Short Japanese Yen = 10,920,000; Long USD = (10,920,000 / 109) = $100,183.5.
Profit made in the trade: $183.5.
ROI of the trade: 183.5/1000 x 100% = 18.35%
Understanding Forex Quotes
Quoting Foreign Currency
Currencies are always quoted in pairs. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed.
The first currency in the quotes act as the 'base currency'.
For example USD/JPY, EUR/GBP, and GBP/AUD, in such cases, USD, Euro Dollar, and Britain Pound are acting as the base currency. Base currency in a Forex quote will always has a value of 1. USD/JPY indicates how much Japanese Yens you can buy with 1 United States Dollar; similarly EUR/GBP indicates the exchange rate of Great Britain Pound with 1 Euro Dollar.
FX Quoting: Bid/Ask and Spread
There are sometimes that you can only see one price but often currency exchange price are display in pairs with 'bid price and ask price'.
For example EUR/USD 1.2385/1.2390, 1.2385 is known as the bidding price, while 1.2390 is the asking price. Bidding price is the price that you sell the base currency (EUR in our case here); asking price is the price that you buy the base currency. The different of the bidding and the asking price is called 'spread'.
You might notice that bidding price is always lower than the asking price. Ever wonder why? The different of the bid-ask price (socall 'spread') is how currency brokers make profits without charging commissions to their clients (sell high and buy low in the same time.)
What's a pip?
A pip is the smallest value in a Forex quote. Take our example earlier on EUR/USD. If the exchange rate goes from 1.2385 to 1.2386; that's one pip. In mathematical definition, a pip means the last decimal place of a quotation.
Note that as each currency has its own value, the value of a pip is different from one another. Say USD/JPY rate at 120.75, a pip would be 0.01 (the second decimal place); while for EUR/USD 1.2385, a pip would be 0.0001 (the fourth decimal place).
Example of Forex Quotes
Confused about the quotes? Don't worry too much about it, you'll get used to them as soon as you move on and start your trades.
For the beginners, here are some quick examples. Try not look at the answer and determine the value of bid price, ask price, spread value, and the pip value.
EUR/USD 1.2385/1.2390
* Base currency= Eur
* Bid price= 1.2385; Ask price= 1.2390
* When selling Euros, 1 Euro = USD$1.2385; when buying Euros, USD$1.2390 = 1 Euro.
* Spread = | 1.2385 - 1.2390 | = 0.0005
* Pip value= 0.0001
EUR/JPY 127.95/128.00
* Base currency= Eur
* Bid price= 127.95; Ask price= 128.00
* When selling Euros, 1 Euro = JPY127.95; when buying Euros, JPY128.00 = 1 Euro.
* Spread = | 127.95 - 128.00 | = 0.05
* Pip value= 0.01
GBP/USD 1.7400/10
* Base currency= GBP
* Bid price= 1.7400; Ask price= 1.7410
* When selling Pound, 1 Pound = USD$1.7400; when buying Pound, USD$1.7410 = 1 Pound.
* Spread = | 1.7400 - 1.7410 | = 0.001
* Pip value= 0.0001
USD/JPY 119.8
* Base currency= USD
* No bid-ask price is displayed, spread value not available.
* Pip value= 0.1
Currencies are always quoted in pairs. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed.
The first currency in the quotes act as the 'base currency'.
For example USD/JPY, EUR/GBP, and GBP/AUD, in such cases, USD, Euro Dollar, and Britain Pound are acting as the base currency. Base currency in a Forex quote will always has a value of 1. USD/JPY indicates how much Japanese Yens you can buy with 1 United States Dollar; similarly EUR/GBP indicates the exchange rate of Great Britain Pound with 1 Euro Dollar.
FX Quoting: Bid/Ask and Spread
There are sometimes that you can only see one price but often currency exchange price are display in pairs with 'bid price and ask price'.
For example EUR/USD 1.2385/1.2390, 1.2385 is known as the bidding price, while 1.2390 is the asking price. Bidding price is the price that you sell the base currency (EUR in our case here); asking price is the price that you buy the base currency. The different of the bidding and the asking price is called 'spread'.
You might notice that bidding price is always lower than the asking price. Ever wonder why? The different of the bid-ask price (socall 'spread') is how currency brokers make profits without charging commissions to their clients (sell high and buy low in the same time.)
What's a pip?
A pip is the smallest value in a Forex quote. Take our example earlier on EUR/USD. If the exchange rate goes from 1.2385 to 1.2386; that's one pip. In mathematical definition, a pip means the last decimal place of a quotation.
Note that as each currency has its own value, the value of a pip is different from one another. Say USD/JPY rate at 120.75, a pip would be 0.01 (the second decimal place); while for EUR/USD 1.2385, a pip would be 0.0001 (the fourth decimal place).
Example of Forex Quotes
Confused about the quotes? Don't worry too much about it, you'll get used to them as soon as you move on and start your trades.
For the beginners, here are some quick examples. Try not look at the answer and determine the value of bid price, ask price, spread value, and the pip value.
EUR/USD 1.2385/1.2390
* Base currency= Eur
* Bid price= 1.2385; Ask price= 1.2390
* When selling Euros, 1 Euro = USD$1.2385; when buying Euros, USD$1.2390 = 1 Euro.
* Spread = | 1.2385 - 1.2390 | = 0.0005
* Pip value= 0.0001
EUR/JPY 127.95/128.00
* Base currency= Eur
* Bid price= 127.95; Ask price= 128.00
* When selling Euros, 1 Euro = JPY127.95; when buying Euros, JPY128.00 = 1 Euro.
* Spread = | 127.95 - 128.00 | = 0.05
* Pip value= 0.01
GBP/USD 1.7400/10
* Base currency= GBP
* Bid price= 1.7400; Ask price= 1.7410
* When selling Pound, 1 Pound = USD$1.7400; when buying Pound, USD$1.7410 = 1 Pound.
* Spread = | 1.7400 - 1.7410 | = 0.001
* Pip value= 0.0001
USD/JPY 119.8
* Base currency= USD
* No bid-ask price is displayed, spread value not available.
* Pip value= 0.1
Advantages in Forex currency trading
Equal Prospective in Rising or Falling Market Trend
There is no structural bias to the market and there are no restrictions on short selling in FX market. Trading in Forex gives you an equal prospective in rising and falling market.
As trades are always done in pair of currency pairs, Forex traders can always find chance to make money in anytime, regardless on the fall or rise period of one single country currency.
Trade Forex 24 hours a day
Forex market never sleeps. In Forex trading, you do not need to wait the market to open, you can always response to world latest movement and news immediately.
Every Sunday 5.00pm in New York, Forex market starts its week from Sydney, followed by Tokyo, Singapore, Hong Kong, London, and New York. In Forex tradng, you can always response to the market trend a lot faster than in any other trading market.
Leverage trading in Forex market
Also, with the flexibility of Forex market trading time, you can work on your trade in Forex during your free time. This means you can start small and work as part time trader before going full time on FX trading.
High Leverage Margin
Forex brokers offer trade margin of 50, 100, 150, or even 200 to 1 of trade margin.
Forex traders often find themselves controlling a huge sum of money with little cash outlay on the table. For example, a $1,000 in a 150:1 Forex account will gives you the purchase power of $150,000 in the currency market.
While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market.
This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
There is no structural bias to the market and there are no restrictions on short selling in FX market. Trading in Forex gives you an equal prospective in rising and falling market.
As trades are always done in pair of currency pairs, Forex traders can always find chance to make money in anytime, regardless on the fall or rise period of one single country currency.
Trade Forex 24 hours a day
Forex market never sleeps. In Forex trading, you do not need to wait the market to open, you can always response to world latest movement and news immediately.
Every Sunday 5.00pm in New York, Forex market starts its week from Sydney, followed by Tokyo, Singapore, Hong Kong, London, and New York. In Forex tradng, you can always response to the market trend a lot faster than in any other trading market.
Leverage trading in Forex market
Also, with the flexibility of Forex market trading time, you can work on your trade in Forex during your free time. This means you can start small and work as part time trader before going full time on FX trading.
High Leverage Margin
Forex brokers offer trade margin of 50, 100, 150, or even 200 to 1 of trade margin.
Forex traders often find themselves controlling a huge sum of money with little cash outlay on the table. For example, a $1,000 in a 150:1 Forex account will gives you the purchase power of $150,000 in the currency market.
While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market.
This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
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