Chapter 1: Forex Trading
The foreign exchange currency market, more commonly written as the
forex market, is the largest of all the investment markets, currently boasting
more than $4 trillion dollars’ worth of transactions per day, or roughly 10
times more than what the New York Stock Exchange can manage. Despite
the lucrative potential available in this market, it was long outside the realm
of the amateur trader as technological limitations made it difficult to amass
the information required for such an undertaking. Luckily, the rise of the
internet, along with countless online forex trading platforms, means that
anyone who is interested can take advantage of the extreme leverage rates
available in the market to turn a small initial investment into a serious
payday.
Before jumping in with both feet, you are going to want to keep in mind the
fact that the forex market is completely speculative which means that unlike
in most markets when you buy and sell in the forex market you aren’t
actually gaining anything physical in the process. Unlike the stock market
where you acquire shares in a specific company, for example, in the forex
market, all you are doing is moving numbers around in various computer
databases with relevant information relating to the countries in question
causing them to either move in one direction or another. Your gains and
losses are then expressed in the currency of your choosing.
If this seems like a bit of an odd system, that’s because the forex market
only exists because international organizations and countries needed an
easy way to move currency around in massive quantities without going
through the steps the average person would be required to do such a thing.
These entities tend to trade in units of currency that are so extreme they can
actually affect the overall value of the currencies being traded, which is
where the speculative side of the market comes into play.
Generally speaking, only about 20 percent of the movement in the forex
market is from these major entities, with the rest coming from investors that
are trying to make a buck from the movement that spreads out through the
market as a result. While a majority of these investors are professionals
working for financial institutions or hedge funds, more and more private
traders are jumping on the bandwagon each year, drawn to the promise of
potentially huge wins thanks to the available leverage.
Forex facts
The most important thing to keep in mind when trading in the forex market
is that each forex trade is actually a pair of disparate trades because you are
always selling one currency in order to pay for another. Forex trades are
made in three separate sizes, known as lots. A micro lot is 1,000 units of a
given currency while a mini lot is 10,000 units of a currency and a standard
lot is 100,000 units of a specific currency.
When the market moves, the smallest amount that is tracked is known as a
pip which is one percent of the total price of the currency in question. When
you are first starting out in the forex market you are going to want to avoid
taking on trades that are larger than a micro lot as in this case the pip is
worth 10 cents of the currency you are working with. This means you won’t
quickly lose your shirt when a trade turns against you in the last moment. If
you stray to mini lots or standard lots you run the risk of losing $1 or $10
respectively, per pip. For reference, you can expect a trending currency to
move around 100 pips per trading session.
While the forex market differs from other markets in key ways, it is
important to always keep in mind that it is the same in the ways that matter
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