Forex stands for the Foreign Exchange Market. It is by far the largest financial market on the planet and is accountable for an estimated 3.3 trillion dollars being exchanged from buyers to sellers and from sellers to buyers, on any given day in the form of currency. The markets are open 24 hours a day except on Sundays. On Sundays the markets open late afternoon/evening depending on where you are in the world.
In the next 10 years the Forex market is projected to exchange anywhere between 5 – 7 trillion in currency exchange on a daily basis. So for starters… this is a huge market and continuing to grow at a rapid rate. Perhaps you have heard of currency markets before…. well if you haven’t heard of them before, this is the global market in which currencies of different countries switch hands.
If you are looking for forex help or forex trading tips, you can find a lot of information here on how it works. For beginners though we are only going to cover the basics so it’s NOT to confusing to understand.
How it works?
Basically what you are doing as a currency trader on the FOREX market is buying a currency pair like the EUR/USD – (EUR/USD stands for the Europe/UnitedStates currency pair) and placing a bet that the pair will go down in value or up in value. Sounds simple right? Think again, there is a lot that goes into this type of trading.
It is a very fast way to make money and a very fast way to lose money. In my honest opinion this is the Riskiest of all investing out there but also the MOST PROFITABLE form of day trading….and YES, I have also traded in this market as well! I will explain why it is so profitable and risky here in a minute, continuing reading…
The cool thing with speculating on currency pairs and the one thing that separates it from all other forms of investing is the trading PLATFORMS and BROKERS that are available with the Foreign Exchange Market. There are too many to list here, so I am creating a review of different brokers and software out there that you can utilize for this type of trading in the near future.
The rules are a little different with forex as compared to just buying a stock or ETF and watching the price go up or down. The reason why I think this market is the MOST profitable and comes with the HIGHEST risk is because of something called a lot size. A lot size is a way to MAGNIFY your money that is invested in a trade, so that you gain more leverage and make bigger profits. Basically in theory you are borrowing money to place on top of your own money to place your bet.
What is a Good Lot Size to use?
This is where good forex trading tips come in to play for you so pay attention. When dealing with lot sizes you have the choice of BUYING or SELLING a currency pair and placing a lot size in the trade. You can place a lot size based upon the amount of TOTAL money you have in your broker account. so if you had 10,000 in your broker account you could easily place a 1.0 lot size or a full lot size on the trade. If you have less money to play with usually you won’t be able to even place a full lot size trade, this simply varies based on your total account value.
Brokers usually will put a limit on your lot size based upon your account value so that you don’t wipe out the entire account value if your trades goes against you and you are playing with larger lot sizes. Yes you heard that right, you can literally commit financial suicide in forex trading.
So what most experts will advise is to play it safe with less RISK by keeping your lot size between .01 and .02 lot sizes so you don’t wipe out your account and hit zero within a matter of minutes.
There is more to lot sizes and in case your wondering about the math involved, to calculate just how much money you are roughly looking at percentage wise, compared to your total account value, that a .01 lot size actually is… I will fill you in on that information at a later time. That is a whole topic in itself. For now just know that the smaller the lot size the safer you are in NOT losing all of your money and losing it very fast.
Fundamental Analysis & interest rates
The next hurdle or challenge to placing a successful trade in the forex market is something I have mentioned in a previous article. It is fundamental analysis and technical analysis. Fundamental analysis means – The study of Geo political moves made by Governments, Central banks and over all market changes from those moves that impact a trade especially in the currency markets.
For example if the International Monetary Fund or the World Bank decided to implement a policy change for all countries that effects the base interest rate for global trade, this would have an effect on all currency exchanges globally. This would mean that some currencies might strengthen when compared to another currency. Other currencies might weaken when compared to a currency and this fact alone, is a huge factor for using currency pairs instead of playing a single currency through a broker. It allows traders the opportunity to take advantage of financial events across the globe all from the access of a computer while sitting in a chair from your home.
NOTE: Countries can make similar changes as the World Bank but only with their own currency. The World Bank regulates global financial policy, while a country can only regulate policies within it’s own currency.
This is something to pay close attention to if you decide to play the foreign exchange markets. Watch for changes to interest rates on trade or import and export of goods in different industry sectors.
The effects of interest rates on a currency
Interest rates tied to a currency can go up or they can go down for a single country. The impact this can have on profits and losses for a country are crucial for expansion or contraction of an economy. Below we describe just what the effects can be on a country for changing interest rates tied to a currency within a single country.
Importing Goods – If interest rates rise for imported goods within a country that would mean that it will COST more for that country to buy goods from other countries. This would weaken that countries currency because other countries are able to SELL and receive more money from the country who’s currency was weakened . If interest rates went down for imported goods for that country, this would strengthen the currency for that country BUYING because things COST less to buy on imported goods being sold by other countries.
Exporting Goods – The same concept applies with exports too but just the opposite of importing goods. If interest rates go up on exported goods for a country the currency would strengthen because it would cost other countries more money to purchase goods from that company doing the exporting or SELLING. If interest rates go down on exported goods from a country, the currency would weaken for that country because it would cost other countries less money to purchase goods from that country doing the exporting.
So think of it this way…there is always a buyer and a seller. A supply and a demand for a service or product. Goods being bought (imported) may cost more or less based off interest rates and goods being sold (exported) can cost more or less based off of changes in interest rates.
What did we learn?
So to re-cap on what to look for and some forex trading tips you can use we have made a list below so that you can keep a better watch on some things in the future when playing currency pairs in the foreign exchange market.
- Keep lot sizes low around .01 and .02 lot sizes.
- Keep an eye out for interest rate changes and financial policy moves made by Governments, Central Banks and the World Bank.
- Understand supply and demand (importing goods versus exporting goods) and the impact that has on a currency or a countries economy.
Important NOTE: Only trade Tuesday through Thursday. Monday’s and Fridays are the beginning of the week and the end of the week. These are days when BIG financial events can either start taking place say on Friday and into the weekend when markets are closed. changes made over the weekend say at an event like a G20 Summit meeting could have harsh implications for a currency pair when the markets open on Monday.
Something to consider: So be ware because if your locked in a trade over the weekend it may be too late come Monday to get out and before you know it your trade might be working against you and you are then LOSING money.
In a later segment I will cover more in detail technical analysis and chart reading of currency pairs for entry and exit points. For now though, remember that the name of the game is to keep your money and not lose it. If you have more information I might have missed on this page for the FOREX market that you would like to add, simply leave a comment below and I will be sure to try and cover it in a later article. Thank You!