Forex trading is the largest financial market in the world, with over $3 billion traded daily. The market is based on trading foreign currencies and profiting on the difference in exchange rates. Here are some tips to help you get started.
Which Currencies Can You Trade?
The currency exchange market is made up of currency pairs, two foreign currencies that have different values. Each currency has a three letter symbol. The major world currencies that are traded are the United States Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Swiss Franc (CHF), the Canadian Dollar (CAD) and the Australian Dollar (AUD). A currency pair looks like this: EUR/USD means that the Euro is being paired against the Unites States dollar.
How Do You Make A Profit?
Just like any other financial investment, in Forex trading you try to buy low and sell high. If you buy EUR/USD at 1.2224, meaning one Euro costs 1.2224 United States dollars, you will want to wait until it goes up to at least 1.2225 before you sell. The higher it goes up the better, however many people will sell if it just goes up a fraction of a cent because you will be trading large amounts of the foreign currencies. Traders usually buy and sell in lots of 10,000 or 100,000.
How to Understand Forex Quotes
In the currency exchange market, brokers profit on the difference that they make by the variance in the rates. If there is a quote that reads GBP/CAD 1.5555/1.5557 it means that the broker will buy it from you at 1.5555 and sell it at 1.5557, meaning he earns 0.0002 on it. Of course, this is then multiplied by 10,000 or 100,000. If you buy the previously listed trade at 1.555 then you will want to hold on to it until you can sell it for a profit and then make another trade with different foreign currencies.
How Much Should You Start With?
Since Forex trading is a high risk, high profit investment you will want to start out slowly and not put in any more money than you can afford to lose. Since the exchange rates of the different currencies can change without a moment’s notice, if something drastic happens in a country's economy, you want to make sure that you can still get by if you lose your investment. Your broker might let you trade on margin which means that you only need to put down a small percentage of the total amount that you want to trade. If you get approved for a ratio of 400:1 that means that you can make a trade of $100,000 with only $250 of your own cash.
How Use Leverage
Leverage is important when you are just starting out since you may not have thousands of dollars to start out with. Many experienced Forex traders use leverage, or margin, exclusively to maximize their profits. If you are only using $250 of your own money and you earn a profit of $500, you get a fifty percent return on your money, even though you profited with the assistance of leverage. But if you had used your own money to get that $500 profit, the rate of return goes down drastically to less than a percent.
How to Use Japanese Candlestick Formations
There are many different ways to check on the foreign exchange market and it's wise to learn them all so that you can make informed buying and selling decisions. One way to see how the market is doing is to learn to read the Japanese candlestick formations which date back to the 1700s. Looking at the charts you will see that the information is written in such a way that makes them look like candlesticks. You will notice that there are vertical rectangles that make up the candlestick portion and then there are wicks at both ends. They may be either black or white. Black candlesticks represent the market closing lower than when it opened and white means that they closed higher. The length shows the difference between the opening and closing prices while the wicks, the thin lines above and below the candlestick, show the session highs and lows.
Japanese candlesticks give a more accurate and detailed view of the market than the bar charts. They allow you to see market reversals earlier than bar charts, giving you a chance to sell your foreign currency before the price drops.
How to Be Successful Trading Forex
The best way to maximize your chances of profiting from this form of investing is to become as educated as possible. Learn about the different charting methods and formations so that you can make educated moves when you are buying and selling foreign currencies.
Professional advice should be sought from financial advisors and planners who can also advise on financing, loans, accountancy and tax issues.