Online Foreign Currency Trading Platform
The small retail traders have been able to participate in the forex trade only in last 15 years or so, after use of internet started in a big way for online foreign currency trading. Earlier large minimum transaction sizes made the forex trade out of the reach of the retail investor. Only big financial institutions, major currency dealers and big speculators were able to take advantage of this fantastic market.
Now trading platforms are available to the small investors. Inter-bank transactions are done in large units, but market maker brokers are able to break down these large units and provide small traders an opening in the forex trade. The market maker broker provides not only a trading platform, but also plenty of support to help individual retail traders. They provide software thru which the traders can do all the trading from their PC. Real time price fluctuations are available in various forms in graphical and numerical displays. Also various tools are available for analysis of data.The market maker provides quotes for different currencies. These quotes are the conversion prices between the currencies that the market maker will honor when a deal is executed. The market price level as indicated by real-time display can be used for guidance but they should not be considered as final rate for a deal.
The trader has to deposit a margin money for trading. Some brokers also insist on an additional maintenance margin which is more like a safety deposit. The traders can leverage the margin money to trade much higher amounts. It is common to have a leverage of 1:100. This means that the trader has to deposit a margin money of USD 1000 to trade with USD 100,000 , which is a common lot size.
As soon as the trader enters a trade with USD 100,000 the software automatically sets a stop-loss such that the trader does not lose more than the margin money. In case the price fluctuation is in unfavorable direction and the trader starts losing money, the software will transact a deal as soon as the loss reaches the amount in the margin money. On the other hand there is no restriction on how much the trader can gain when price fluctuation is favorable.
This type of leverage you cannot find easily in any other market. Although leverage of 1:100 is the most common, some brokers allow even higher leverage.
A demo account is one of the many facilities offered by many market maker broker. Very often there is no charge for the demo account. The account holders are provided with trading platforms just like real traders with exact quotes and all the displays. The major difference is that demo account holder does not invest any money, only does mock “trades” with some “dummy” money provided by the system. The demo account provides very good opportunity for learning and testing the trading skill.
Forex market is an exciting field. People with patience and discipline have unlimited earning opportunity.
Foreign Currency Trade – Fundamental and Technical Analysis
Sanjay JohariForeign currency trade is based on anticipation of price movement. Traders use various means to predict how the market is going to behave; particularly in which direction the prices are likely to go. More serious traders also try to predict the likely price variation and the timeframe. Based on this projection and anticipation of price movement the traders take their positions.
The Traders buy a foreign currency in anticipation of upward price movement on the hope of selling it at a higher price. In case they expect a downward price movement of a particular currency, they sell the currency on the hope of buying it back at lower price.
The accuracy of the prediction of price movement will determine how much the trader is going to earn. The whole game plan of forex trade is correctly anticipating the price movement – at least its direction, and recognizing when the anticipated movement starts and ends. The price fluctuation is not uniform over time. At times it tends to play in a narrow range and then shoots out sharply in upward or downward direction. The large price movement in either direction is called trending. The prices are said to be in a trading zone when they fluctuate in a narrow range.
Higher profits can be made price is in trending mode. The trader has to recognize that the trend has started and enter into a deal. He has to recognize again when the price trending is over and close the deal to earn profit.
The trader can study the price movement using fundamental analysis, technical analysis, or a combination of these basic analysis techniques. There are millions of factors that can influence price movement. In fundamental analysis the trader keeps an eye on major factors that can affect the prices significantly. These factors could be economic, political, environmental, social and many other such issues. Government policies, economic conditions, demographic changes can all influence the market. The trader who uses fundamental analysis has to keep a watch on the major influencing factors.
On the other hand technical analysis is based on price movement history. By studying the existing price movement its future behavior is predicted. The price of a foreign currency is result of so many factors – factors external to the market as well as combined sentiments of the traders. Technical analysis is based on the assumption that the market action discounts everything. This will mean that at any moment the price represents sum total of all the factors by which it is affected. Moreover, it is believed that the collective psychology of the traders produce recognizable patterns in price movements. By studying these patterns it is often possible to predict the future price behavior. The history of price movements tend to repeat, therefore by studying past patterns it is possible to correlate patterns with large movements. The price patterns can indicate trending and reversal points. These are just the points the trader needs to earn profit.
Which analysis is more reliable? Well, this is a matter of opinion. Both methods have their merits and demerits. It should be remembered that fundamental analysis and technical analysis are tools in the hand of the trader. It is up to the trader to make best use of them. Most of the traders rely on both the tools to varying degrees. The trader also depends upon his own experience, his hunch or gut-feeling and suggestions from different source.
Based on basic analysis people have developed many “strategies” for forex trading and software to implement those strategies. By following one of those strategies the trader does not have to do much analysis by himself – he just does what the strategy suggests. I have not seen any strategy that is always correct. It is possible to have more correct moves and less number of incorrect moves. But it is always advisable to stick to one strategy. Working without a strategy or jumping from one course of action to another can be disastrous. Decide how you want to operate and stick to it. Confidence and experience you get from your sustained actions can be more valuable than profit you earn from the trade.
Genuine Online Forex Trading
Genuine online forex trading - is it for you?Trading in the foreign currency market involves risk and genuine online trading forex is not for those who try to play extra safe. Forex market is fast-paced, changes quickly and opportunities present themselves in narrow slots. Within those slots the trader has to make his move. The trader has to learn from others and from his own experience to recognize and even anticipate those narrow slots of opportunities in time so that quick decisions are right more often than wrong. This is a challenging as well as motivating task for interested persons that can give enormous personal and financial rewards.
Although volume of forex trade is much higher than the volume of stock trading, there are far fewer number of private individuals involved in forex trading than in stock trading. Most of the traders in foreign currency markets are international banks and other large institutions. Private citizens account for only about 2% of forex traders.
Participation of private citizens in forex trading is growing and is there to stay. This has been made possible due to advancement in internet and information technology. Forex market is easily accessible to private citizens because of these advancements. New entrants to this field generally take this up as a part time job. It will be too much to expect that a newly interested person will make huge profits from the beginning. Generally the new trader has to go thru the learning curve to acquire requisite skill, knowledge and experience for success in this field. Then the trader can turn it into a full time occupation.
A full-time trader in genuine online trading forex will have enough work to keep himself fully occupied. He has gained enough confidence and success to quit his day job and depend on the forex trade for his living. He has not only to watch the market; he has also to keep track of at least important factors – news around the world – that can impact forex market significantly. Smart trader is always watchful, ready to make his move and go for the kill at opportune time.
Forex market has its own advantages and drawbacks. There can be a bad day in stock market, but not so in forex trade. If there is bad day for one nation’s economy, there are several others where trading can be done. This renders forex market rather more stable than stock market. In any case there is some element of speculation involved; trader’s investments are at risk and therefore he cannot afford to relax his watchfulness. With right dedication and resourcefulness forex trading can yield handsome returns.
Computers are of immense help to the trader. Computers help not only in fast transfer of information, they are also helping in decision-making. There are traders who depend heavily on technical analysis of price movements to make a decision. The theory behind technical analysis says that the past movement of prices can be used to predict the prices in future. Technical analysis can be used to judge with fair accuracy when the price is going to change direction and this information can be used for making a profit by selling or buying foreign currency just before or after the trend changes. Computers can be used to identify those turning points in time for taking a decision.
Genuine online trading in forex may not be suitable for everyone, but those who get a “hang” of it can make enough regular income to consider it a full-time occupation.
Rate of Foreign Exchange
What is rate of foreign exchange and how to read it?Rate of foreign exchange is the relative value between two currencies – how much is one currency worth in terms of the other currency. Forex rate is always relative value between a pair of currencies. Foreign exchange rates between different pairs of currencies are the basic information that are used in foreign exchange trading. Understanding and reading foreign exchange rates is the basic skill that forex trader has to acquire, much like learning the basics of calculation before one becomes a mathematician.
As already mentioned a forex rate is always in pairs of foreign currencies, for example US$ and Euro. This pair may be expressed as USD/EUR followed by a number. Each currency has been assigned a 3-digit code that is used universally. US$ is expressed as USD and Euro is shown as EUR. The number which follows the pair indicates how many of second currency is worth one of the first one. For example, say a forex rate is expressed like this:
USD/EUR : 0.7838
This indicates that one of first currency (US$ 1) is equal to 0.7838 of second currency (Euro), or
US$ 1 = 0.7838 Euro , or
US$ 100 = 78.38 Euro
The forex rate of any pair of currencies keeps on changing all the time as market perception changes. The forex trader has to watch the forex rate he or she is interested in constantly, or he (or she) may use software to monitor the forex rates. The traders examine trends in various currencies’ performance, noting which are going up and which are going down. If a rate suggests, say, that the British pound is starting to increase in value compared to the euro, a trader might exchange his euros for pounds. Then, after new rates show the pound has become very strong, he can swap back again, turning a profit because the pound is now worth more than he “paid” for it.
Forex rates are available at numerous places all over the Internet. Interested observers of the forex trading industry might glance at them for reference on hundreds of different Web sites. Regular traders, though, usually own software that keeps them up to date on rates throughout the day, without having to visit a particular site to get them.
This is important, because rates change constantly, and can be influenced by a wide variety of economic and political factors. The overall change over the course of a day usually isn’t more than a few percentage points either way, but there are minor changes regularly, and those minor changes add up in the long run. Experienced traders watch the rates for those tiny fluctuations, carefully observing whether there is a general upward or downward trend that requires their attention. More important, the traders watch for any CHANGE in the upward or downward trend. The points at which the forex rate changes direction are the profitable trading points.
For example, say Euro has started to become stronger in relation to US$. An astute trader will identify the beginning of this upward trend. He will purchase Euro with his US$ or convert his US$ in Euros. The he will watch for reversal of this upward trend. He will try to identify the end of the upward trend and at this point, when Euro has become stronger in relation to US$, he will sell Euro and purchase US$. This time he will get more US$ for his Euros than he used to purchase those Euros. Therefore he will end up having more dollars than he started with. These extra dollars, minus the trading expenses, are his profit.
Foreign Currency Conversion
On a foreign currency conversion table the conversion rates between currencies look something like this :
USD / JPY 117.77 / 117.81
In this example USD stands for US dollar and JPY is Japanese yen. The letters used for identifying currencies are 3-digit codes as specified by International Standard ISO 4217. Some of the most frequently traded currencies are :
USD US Dollar
EUR Euro
JPY Japanese Yen
GBP British Pound Sterling
CHF Swiss Franc
The first value in the conversion rates is the bid price. In our example this value is 117.77. In case you wish to sell USD in exchange for JPY the market is prepared to give you JPY 117.77 for each US dollar you are selling.
The second value is the ask price, which is 117.81 in our example. This is the price the market will charge you if you buy USD with JPY. For each US dollar you buy from the market you will have to spend JPY 117.81.
The exchange rates are quoted real-time and are applicable for the duration they are displayed which may be just a few seconds. As soon as new values appear, those new values become applicable until they are replaced with yet another set of values.
There is a difference between ask and bid values which is called the spread. In our example the spread is 117.81 – 117.77 = 0.04
The foreign exchange is traded in lots. The most commonly used lot size is USD 100,000.
Let us consider this example of conversion rates between US dollar and Swiss franc :
USD / CHF 1.2143 / 1.2148
In the parlance of foreign exchange trading 1/100th percent of the value is called a pip – percentage in points. This will be 0.0001. In this example the spread between bid and ask rates is 5 pips ( 1.2148 – 1.2143 = 0.0005, or 5 pips ).
In case of JPY one pip is 0.01, and not 0.0001 as in the case of other currencies.
Quite often, in display of exchange rates, 3rd and 4th digits after the decimal point are shown prominently.
Let us take another example :
USD / JPY 116.70 / 116.75
Let us say a trader starts with USD 100,000 lot. The trader uses this lot to buy Japanese Yen at JPY 116.75 to a US dollar. This is the “open” position held by the trader at this stage. The trader believes that the price of yen will change in his favour and gives instructions to sell his yen when the bid rate reaches 116.95. (He places a limit order.)
After sometime the following rate is displayed :
USD / JPY 116.95 / 117.00
The program used by the trader for his trading will automatically sell his yen at JPY 116.95 to a dollar as soon as this value is attained.
In this deal the difference between the two rates is 116.95 – 116.75 = 0.20 or 20 pips.
The value of each pip in terms of US dollars for the lot size will be
0.01 / 116.95 * 100,000 = USD 8.55 per pip
The trader has made 20 pips, therefore his profit will be
USD 8.55 / pip * 20 pips = USD 171
In forex trade it is customary to indicate profit and loss in terms of pips.
Ok then, I'll be back soon.
Online Foreign Exchange Trading
Foreign exchange trading involves purchasing one currency by spending (or selling) equivalent amount of another currency; for example purchasing Japanese yen with US dollar. Each transaction is an exchange between a pair of currencies. The online foreign exchange trading facilitates transactions on the spot in which case the exchange rates prevailing at the time of transaction is applicable.
Although this is a simplistic view of online foreign exchange trading, the foreign exchange market is by far the largest of all the markets in the world in terms of amounts involved. The daily average turnover around the world is close to US $ 3 trillion. The market works 24 hours a day (except on weekends). There are many participants in the market including central banks, commercial banks, corporations, institutional investors, hedge funds and private individuals. The private individuals like you and me who participate as retail traders account for about 2 percent of total volume traded. Even this amount comes to staggering US $ 25 – 50 billion turnover every day.
Online foreign exchange trading is of interest to individuals because the market provides tremendous earning opportunity. In this trade there is theoretically unlimited profit potential whereas the loss is limited only to the amount invested. Although stock market and foreign exchange market are often compared, these two markets are quite different. The foreign exchange market does not have headquarters. It does not have controlling institution comparable to stock exchange. The market rates of various currencies are determined by about 4500 leading banks and institutions all over the world.
Most of the transactions in the foreign exchange market – estimated at 95% - are speculative in nature. In this type of transactions there is no physical transfer of currencies. The trader buys a currency not for possessing that currency but for selling it back hopefully at a profit. The trader tries to earn a profit by taking advantage of constant fluctuations in the values of currencies.
Development of web-based technology and internet opened the forex market for retail traders sometime in 1995 – 1996. The online foreign exchange trading was possible only because of this development. Any market consists of people and the collective sentiments of the people have a strong bearing on how the market is going to behave. The trick of succeeding in turbulent markets like forex market is not to get swayed by public sentiments, but rise above it and view it objectively to anticipate the market movement.
The traders in forex market need to keep their emotions under control. They should be guided not by their emotions but by carefully thought-out strategies. Before participating in actual transactions the traders would be well advised to acquire sufficient knowledge – knowledge about how the market operates and how various factors influence the market. Knowledge can help the traders overcome the emotional factor and adopt a rational, objective approach to gain from the market.
I will be posting more articles in this blog.
Sanjay Johari
