Foreign Exchange Trading

The world crisis is affecting you every day and you are loosing money every second. The economic crisis may last until 2011 but you could make profits in this time because there is a way to make money that works the same in a recession or in an economic growth. This online investment is called: foreign exchange trading.

What is FOREX?

FOREX = FOReign Exchange and you can trade 24 hours a day on the Forex Market.

The FOREX is larger than all other financial markets COMBINED. The Foreign Exchange (FOREX) market is a cash (or “spot”) interbank market established in 1971 when floating exchange rates began to materialize. This market is the arena in which the currency of one country is exchanged for those of another and where settlements for international business are made.

The FOREX is a group of approximately 4500 currency trading institutions, including international banks, government central banks and commercial companies. Payments for exports and imports flow through the Foreign Exchange Market, as well as payments for purchases and sales of assets. This is called the “consumer” foreign exchange market. There is also a “speculator” segment in the FOREX Companies, which have large financial exposures to overseas economies participate in the FOREX to offset the risks of international investing.

In this article I will try to offer you an interesting introduction to foreign exchange trading and I will offer you answers to some of your questions.

How is foreign exchange traded?

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second currency is called the counter or quote currency. The base currency is the "basis" for the Ask or the Bid. For example, if you Ask EUR/USD you have bought Euros (and simultaneously sold dollars). You would do so in expectation that the Euro will appreciate (go up) relative to the US dollar. FX is traded in lots, which represent 100,000 units of the base currency. If the EUR/USD is quoted at 1.2253, that means that one Euro is currently worth just over $1.22. If the market moves from 1.2253 up to 1.2254 that represents a move of one pip. A pip is the smallest increment a currency pair can move and in the case of the EUR/USD currency pair a pip is worth $10 in a 100K account and is $1 in a mini account.

An FX Trade Example:

If you think that the Euro will rise relative to the U.S. Dollar you would Ask one lot of the EUR/USD currency pair.

The EUR/USD is trading at 1.2553 when you Ask it.

The EUR/USD is trading at 1.2674 when you Bid it.

You bought at 1.2553 and sold at 1.2674 for a profit of .0121 or 121 pips.

Each pip is worth $10 in the 100K account.

121 pips x $10 = $1,210 profit

In FX, you also have the opportunity to short (Bid first) a currency pair if you think it will fall in price.

If you think that the Euro will fall relative to the U.S. Dollar you would Bid one lot of the EUR/USD currency pair.

The EUR/USD is trading at 1.2659 when you Bid it.

The EUR/USD is trading at 1.2523 when you Ask it.

You bought at 1.2523 and sold at 1.2659 for a profit of .0136 or 136 pips.

Each pip is worth $10 in a 100K account.

136 pips x $10 = $1,360 profit

While these are profitable examples, remember that ending up on the wrong side of a trade can cost you a lot of money.

We have a special category on our money making forum for FOREX and if you didn’t visited it yet you can Click HERE to become a member of our forum and discuss about forex trading.

What is the significance of currency pairs?

A currency pair represents the exchange rate between the two currencies. For example, the rate at which the EUR/USD is trading that represents the number of US Dollars one Euro can purchase. The first currency is called the base currency and the second currency is called the counter currency.

An example of how currency pairs trade is if a trader believes the Bank of Japan will intervene to cause a decrease in the Yen against the US Dollar, then the trader would Ask USD/JPY (Ask the US Dollar/Bid the Yen). However, if the trader believes that Japanese investors are losing faith in the United States’ economy and are pulling money out of the US into Japan, then the trader would Bid USD/JPY (Bid the US Dollar/Ask the Yen).

What is leverage?

Leverage allows traders to borrow money and use that money to invest in the foreign exchange market. Because of leverage, clients without a huge amount of capital are able to make large investments, whereas in other markets such as the equities market, clients would have to pay 50% of the full amount for each share of stock they were investing in. Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to Ask a “lot” worth $100,000, with 100:1 leverage the trader only has to put up $1,000.

Leverage is about risk. Increasing your leverage increases both your opportunity to take bigger profits AND rack up bigger losses. It’s easy to see in this graph that the amount of margin required in taking positions in the currencies market is much less than in the equities and futures markets.

What is margin?

Margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. In the event that funds in the account fall below margin requirements, your broker will close some or all open positions. This prevents clients’ accounts from falling into a negative balance, even in a highly volatile, fast moving market.

For example, let’s say you have an account with $10,000. That means you have $10,000 of usable margin. If you use $7,000 to Ask 7 lots of USD/JPY, you now have $3,000 of usable margin left, meaning that you are allowed to lose $3,000 before you are under the margin requirement. The account equity remains at $10,000 until you begin to make or lose money on the position. Now, if the USD/JPY decreases to the point that you end up losing the $3,000 which is left in your account, then the broker will close all of your positions to ensure that you do not lose more than you have in your account.

How are leverage and margin related?

Leverage and margin are related in the way mentioned above – the amount of leverage a market maker gives to a client defines the amount of margin that the client will have to commit in order to take a position in the market. For example, when leverage is 100:1, the “1” in the leverage ratio signifies the amount of capital the customer has invested of his own money, which is also known as the margin.

How much does it cost for a trader to make a trade?

Traders do not take positions on a currency pair at the exact rate at which the currencies are trading. Instead, there are two rates for the currency pair: the bid rate and the ask rate.

The ask (Ask) rate is higher than the bid (Bid) rate and the spread is 3 pips, meaning that if a trader Asks this pair, then the Bid rate of this pair will have to go up 3 pips in order for the trader to break even. The ask rate will always be higher than the bid rate. The difference between the bid rate and the ask rate is the spread. The spread is an automatic cost that the trader incurs when making the trade. Because of this spread, traders will take a position they started with a small loss and will need to gain some profit in order to break even.

For example, if a trader Asks into a position at the ask rate, and then immediately closes the position at the bid rate, the trader will incur a cost equal to the spread. These spreads are seen in every kind of market. However, because of the broker-based system in the equities and futures market, it can sometimes be difficult to identify where and how much the spread cost is.

This is only a short introduction to foreign exchange trading. For more detailed information we’ve created special categories on Collective Investments Forum:

The main Category is FOREX and it contains discussions about:

The most important thing in Forex Trading is Money Management. Most forex traders spend 99% of their time on analysis and the buying and selling of currency pairs. Many of these traders ultimately join the legions of ex-forex traders because they ignored the most important aspect of speculation – money management.

You can be a good analyst and lose money trading due to poor money management. But, if you have sound, market-proven money management concepts, and the discipline to follow them, you will never lose all of your money. Click Here to read more about money management on our forum. Pivot Point Analysis is another interesting thread on our forum that will help you understanding the forex trading.

You will need a Forex Broker to trade forex. There are a lot of foreign exchange brokers online but I will tell you more about one called Marketiva.

MARKETIVA has established itself as an industry leader thanks to its advanced trading platform and its highly recommended customer service. MARKETIVA state they have “more than 260,000 serviced users, 150,000 unique and live trading accounts, and more than 2.7 million live orders executed each month”.

No minimum deposits are required to open an account with MARKETIVA. Actually, when you first log in, your account is already charged with $2.5 in real money, and $100,000 virtual money. The same account and platform are used for practice money and for the real money, so only a click of a button is needed to determine which funds you wish to use. Best of all, a $5 reward is given for opening a new account and depositing only $1. MARKETIVA’s rates are between 2-4 pips for the major pairs, offering less than 20 pairs all together. The leverage they offer is of 1:100, allowing a minimum trade unit of 1 lot! In addition to FOREX trading, MARKETIVA also allows trading funds, offering a list of 7 funds to choose from.

The process of opening up a MARKETIVA account is quick and easy. Registration process is simple, and requires only minimal details for opening the account. No further procedures were required for downloading the software, which is also a quick and easy process.

Streamster, MARKETIVA’s software, is known for its ease of use and flexibility. It has a high-tech look & feel, yet it is simple and intuitive enough for a beginner to understand. The software includes advanced charting tools, which are fully customizable, and enable opening positions right from the charts themselves.

Accounts can be managed through the “Account Center” on MARKETIVA’s website, so it is not necessary to actually be logged into the Streamster download software, to follow account balance, open positions and trades.

Deposit and withdrawal processes are executed through the web “Account Center”, and are clear and easy to follow through.

There are different payment methods available to make a deposit on MARKETIVA. No fees are charged for deposits, however, these payment methods do accrue charges for withdrawals.

The fee for withdrawing by wire transfer is $14.00, while for all the rest it is $7.00 and only for the first withdraw.

Around the clock customer support is available from professionals with any questions that may arise, technical as well as trade related. MARKETIVA’s support standard is regarded by users as one of the highest in this field. This is despite the fact that support is provided mainly via email, and through the public chat-room, open be read by all clients.

A multitude of additional services and resources are offered the trader. A section of FAQs, dealing with general issues of trade in the FOREX market, as well as specific questions about operating their software, is available on the website. The answers cover lots of ground, although not in the most enticing way.
Market news and alerts are provided from within the system, to aid traders with their decision making processes.

Instrument Profiles are also provided. These profiles contain detailed information categorized in several sections, allowing the trader to make a better decision on which instrument to trade.
MARKETIVA enables clients to chat online with other traders, so they can discuss market events and trends, and exchange ideas and tips.

To further enhance the community atmosphere, MARKETIVA runs Marketiva Masters Tournaments. MARKETIVA posts a list of traders who made the most profits during the last month and during the previous year. The #1 earner is named Marketiva Master of the month or year.

The user-friendly software, high quality support, advanced community tools and low risk requirements, all make MARKETIVA very attractive for a newcomer to the FOREX market.

I invite you to participate at our Marketiva Discussion on our forum or you can introduce your favourite Forex Broker on Forex Brokers, Trading Platforms.

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