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What is Forex Trading?


Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange.
For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called going long on the EUR/USD.


How Does Forex Trading Work?

Forex trading is typically done through a broker or market maker. As a forex trader you can choose acurrency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

Forex Trading


While thousands of people trade in Forex daily, some still wonder - what is Forex trading?
    In short, it's buying and selling currencies - or money, if it sounds better. Imagine that you live in Great Britain. Your friends tells you he is going to the US next week for vacations and therefore he requires some American money. Obviously, in the US no shop would accept British pounds.
    Luckily, you have some dollars left from your last business trip to New York, so you take your wallet, get twenty banknotes of 100 USD and sell them to your friend. Obviously, he pays you back with British pounds - because you live in London, you are not interested in any other currency. 
    Well, you have just made a forex operation! Now, imagine that instead of taking British pounds from your friend, you ask him to give you back the same amount he received - 2000 USD, to be accurate. At this moment, the exchange rate was 1.4282, let's assume. He spends two joyful weeks in the US, traveling around the states, tasting some delicious stakes with Californian wine and even singing local anthem. Then your friend comes back to London and he has to give you back 2000 USD. Luckily, the exchange rate of US dollar versus British pound has increased dramatically due to some latest news from the US - it's 1.4021 now, meaning US dollar is now more expensive in the UK! So, once you receive 2000 USD back, you go to a currency exchange window at your favorite bank and change dollars back to pounds. And then - surprize, you made a profit because of the currency rate fluctuations!
    Now, you actually did some primitive form of forex trading!
    Nowadays, there are more sophisticated and high-tech ways to do forex trading rather than selling currencies to your friends and fellows. You can open an account with a forex broker and start fx trading online - from any place in the world, with tens or hundreds of different currencies! And thanks to leverage - automatic "credit" system, your profits can increase ten times or even one hundred times!
    So, why waste time, why not start live forex trading right now! Forex4you will be glad to assist you with any queries that may arise throughout the process!

Market Size and Liquidity


The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives.
Trading in the UK accounted for 36.7% of the total, making UK by far the most important global center for foreign exchange trading. In second and third places, respectively, trading in the USA accounted for 17.9%, and Japan accounted for 6.2%.[5]
Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. FX futures contractswere introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Most developed countries permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies.[6] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some controls on the capital account.
Top 10 currency traders [7]
% of overall volume, May 2011
RankNameMarket share
1Germany Deutsche Bank15.64%
2United Kingdom Barclays Capital10.75%
3Switzerland UBS AG10.59%
4United States Citi8.88%
5United States JPMorgan6.43%
6United Kingdom HSBC6.26%
7United Kingdom Royal Bank of Scotland6.20%
8Switzerland Credit Suisse4.80%
9United States Goldman Sachs4.13%
10United States Morgan Stanley3.64%
Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004.[8] The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution methods and the diverse selection of execution venues have lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot FX turnover, or $150 billion per day (see retail trading platforms).
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading center is the UK, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the IMF calculates the value of its SDRs every day, they use the London market prices at noon that day.

Speculation in Forex Trading


Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[20] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[21]
Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors.[22]
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[23] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[24]
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.

Financial Instruments of Forex Trading


Spot

spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.


Forward

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.


Swap

The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.


Future

Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.


Option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Forex Trading Characteristics


There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to theover-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspaceopened in 2007 and aspired but failed to the role of a central market clearing mechanism.[citation needed]
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were:
  • EURUSD: 28%
  • USDJPY: 14%
  • GBPUSD (also called cable): 9%
and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the yen (19.0%), and sterling (12.9%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Features of the ForexTrading.com account

Leveraged trading on up to 30 of the most liquid currency pairs, 12 index CFDs and 13 commodity CFDs, including oil, gold and silver.

Margin requirements starting at 1% for foreign exchange, 4% for indices and 5% for commodities. Half margin required on the first EUR50,000, or equivalent, of collateral.

Minimum initial funding of $2,000 or equivalent by bank tranfer. Credit or debit card refunding.
Call center and chat service and support in English.

Choice of downoadable ClientStation or browser-based WebTrader trading platforms.

Both platforms feature common trading tools, including technical analysis charts,economic calendar and fx price alerter.

A modular forex education program with video and text tutorials.

How To Establish a Personal Strategy


Forex trading is one of the most versatile types of investments. You can profit from price movement in either direction. You can magnify your returns to almost any degree through high amounts of leverage. You can profit in the long-term scale or profitably work with trades that last only a few minutes. You can even expand into currency futures and add options trading.
However, this also means that the forex market involves lots of different trading strategies. For the sake of simplicity, we can say that these range from the short-term to long term strategies.
At the smallest time durations, scalping takes advantage of the micro-volatility a currency pair might experience. Most scalpers open at least a hundred positions in a single day and the majority of those trades stay open for less than five minutes. The focus is rarely on trends or the fundamentals behind the currencies as much as the quick jumps that are always happening.
Swing traders are more concerned with trends. As the name suggests, they usually open a trade at the top or bottom of a price trend, just as it reaches support or resistance. If all goes as planned, the currency will turn and they can profit from the next trend—hopefully closing the trade just as the price reaches new support or resistance.
Carry trades are inherently longer term because they rely on the underlying interest rates between currencies. For instance, JPY (the Japanese Yen) maintained rock-bottom interest rates for many years. At the same time, interest rates were much higher elsewhere in the industrialized world. So if you used yen to buy dollars, for instance, and held them for a certain period of time, your profit would be the difference between the two interest rates. Magnify this with leverage, and it might be significant.
Of course, the most basic type of trading is a medium to long-term strategy based on the fundamentals. Here, you simply evaluate where you think a given currency is going and try to find a pair with one currency headed up and another headed down. If your guess is right, holding the pair for an appropriate length of time can yield good profits.
So what is the best strategy? Like most questions in investment, this has no simple answer. Each strategy has pros and cons. The cons for scalping are the constant focus it requires, the temptation to raise leverage inappropriately, and the challenge of forex brokers that allow it. Swing trading requires a good sense of timing and facility with several technical analysis tools. Carry trades are often simple to research, but it is increasingly hard to find good pairs to use since most of the industrialized nations now have extremely low interest rates.
In general, the most versatile strategy and the most useful for beginning traders is day trading based on the fundamentals. A medium range is also helpful because it requires low capital with minimal risk. This simple method is also a good starting point. As you gain more experience you can specialize into other trading strategies.
If you are an experienced trader, try learning strategies you have never used before. The ideal is to have facility in all of the methods and be able to switch between them. Certain opportunities are ideal for certain strategies but not others. If you know how to use all of the methods, you can adjust quickly and maximize your profits at any one time.
So what is the best strategy? Here’s a simple answer—probably a hybrid form of them all!

Forex Trading Strategies And Systems


I've been trading the forex markets for several years now so I've developed quite a few different systems in my time. However there are some that are more profitable than others, so let me share you with you some of my most profitable forex trading strategies.

4 Hour Trading Strategy
I created this trading strategy myself and have been using it for several years now. This one system has generated more profits that any other system I have ever used, and yet it's surprisingly simple.
I simply look at the daily trend for a particular currency pair (usually the GBP/USD, EUR/USD or USD/JPY pair) using a very simple but effective technical indicator, then I wait for two EMAs (exponential moving averages) to cross over in the same direction on the 4 hour chart.
I will then enter a position (usually after a slight pull-back) and will employ a two-part exit strategy to maximise my profits. One half of the position will be closed out early for a safe profit, and the other half will be left to run for as long as possible in order to capture those really big price moves.
As I say, this particular forex trading strategy is highly effective, as regular readers of my blog will know because I share my trading results every week in my 'Weekly Trading Updates'.
Anyway if you would like to read all about my 4 hour trading method, you can access it (for free) by filling in the short form to the right and subscribing to my newsletter.
The only problem with trading this strategy is that there will always be quiet periods and particular days where you know you are not going to get any set-ups on any of the major currency pairs. Therefore at times like these I will often employ some of the other trading methods that I keep in reserve:

CCI Divergence Trading System
This is a forex system that I've recently created and it basically uses the popular CCI indicator with two different settings. The key here is to wait until there is divergence between both of the CCI indicators at the same time because this will give you a set-up with a very high success rate.
You don't get that many good set-ups per day using this trading strategy, but when you do, you are likely to make some decent profits because it is a very high probability set-up.
I have discussed this particular strategy elsewhere on this blog so please click here if you want to find out more about this CCI Divergence Trading System.

Forex Income Engine 2.0 Methods
At the time of writing (20 June 2009) I've just started using the three day trading methods included in the Forex Income Engine 2.0 course as well. I've always been quite sceptical about many of the short-term forex methods that I come across, but I've been very impressed with these three methods so far because they do actually produce some very good returns.
Anyway if you would like more details about each of these methods you can read all about them on my Forex Income Engine 2.0 review page.

Forex Nitty Gritty Method
This trading method was included in the Forex Nitty Gritty course and although it is a very basic method, it is actually surprisingly effective. The goal is to look for pairs that are in strong upward or downward trends, wait for a pull-back, and then enter a trade if the trend continues.
I've been using this method on the 15 minute charts for quite a while now and it has always performed well for me because these continuation trends occur all the time.
Again if you would like to find out more about this particular trading method, you may like to read my full review of Forex Nitty Gritty.

Long-Term Trading Strategy
I'm not really a long-term trader but I do occasionally open a position if a good trading opportunity arises. I will usually use the daily charts for these trades and will look at a variety of indicators such as the 200 day moving average, the supertrend indicator, established support and resistance levels, fibonacci levels if applicable, and Marketclub's excellent trading signals.
I will regularly post my long-term analysis of the various currency pairs on this blog, but I will only follow this up with an actual trade if I'm really confident about my predictions.

Other Forex Trading Strategies
Finally as well as all of the trading systems and strategies listed on this page, I also have a few breakout strategies that I like to use when a good opportunity presents itself. I'm also constantly testing out new ideas and reviewing the various trading systems that I get sent regularly by product owners who want me to promote their product.
However for the most part it's my 4 hour trading strategy that I spend most time on because this is my core system which generates the most consistent and reliable profits. All of the other forex trading systems are used to boost my trading pot during the quieter periods of the week.