How to trade FOREX
Step One
The step 1 explains the notion behind the FOREX trading by defining certian concepts and terms. The foreign exchange trading is always done in terms of quotes and understanding these quotes might not be very easy in the first place. In order to get a hold on the foreign exchange quotes, a person needs to remember two things [4] i.e. a) ''The currency listed first in the quote is the base currency and b) The base currency has always the value 1.'' For instance, GBP/JPY has the base currency as GBP. The quotes are generally expressed in terms of pair currencies e.g. if quote states that GBP/JPY is equal to value 221.91 that means 1 GBP values to 221.91 Japanese yen. So, if this value increases then GBP has appreciated in value in comparison to Japanese yen. The prices in these quotes are expressed in terms of pips which stand for “percentage in points”. These are basically the fourth decimal point i.e. 1/100th of 1%. The example of a quote which involves 10pips increase could be USD/CAD = 1.1355/1.1365 (note the last two digits). In this case, an increase in pips means weakening of Canadian dollar. As per [2], ''the smallest move that a currency pair can make is one basis point or 0.00001.'' The quotes also use two important terms known as bid and ask which makes it as a two-sided quote. ''The bid is the price at which the base currency can be sold simultaneously buying the counter currency. The ask is the price at which the base currency can be bought at the same time selling the counter currency'' [2].
The step 1 explains the notion behind the FOREX trading by defining certian concepts and terms. The foreign exchange trading is always done in terms of quotes and understanding these quotes might not be very easy in the first place. In order to get a hold on the foreign exchange quotes, a person needs to remember two things [4] i.e. a) ''The currency listed first in the quote is the base currency and b) The base currency has always the value 1.'' For instance, GBP/JPY has the base currency as GBP. The quotes are generally expressed in terms of pair currencies e.g. if quote states that GBP/JPY is equal to value 221.91 that means 1 GBP values to 221.91 Japanese yen. So, if this value increases then GBP has appreciated in value in comparison to Japanese yen. The prices in these quotes are expressed in terms of pips which stand for “percentage in points”. These are basically the fourth decimal point i.e. 1/100th of 1%. The example of a quote which involves 10pips increase could be USD/CAD = 1.1355/1.1365 (note the last two digits). In this case, an increase in pips means weakening of Canadian dollar. As per [2], ''the smallest move that a currency pair can make is one basis point or 0.00001.'' The quotes also use two important terms known as bid and ask which makes it as a two-sided quote. ''The bid is the price at which the base currency can be sold simultaneously buying the counter currency. The ask is the price at which the base currency can be bought at the same time selling the counter currency'' [2].
Step Two
The second step describes the powerful features of the FOREX trading system. The leverage & margin are the major features helpful in drawing the attention of the traders because these increase the buying power of the traders. ''The leverage allows the trader to expect high returns on investment (ROI) on even small market movements and it also utilizes less money to trade'' [4]. On the other hand, margin in forex allows the investor not to pay any interest to the amount lender on the amount borrowed for the trade. In forex, margin is the minimum amount needed to place the trade. This can be the initial amount with which the forex trading account was opened. The example below helps in explaining the concept in detail:- Supposedly, The balance in the account (trader’s) is = $10000 and the US dollar measured to be as undervalued against the JPY. Now, to place a trade investor has to buy USD by selling JPY and wait till the rate increases. Assuming the current bid/ask price for USD/JPY = 119.30/119.40. This means that the trader can buy $1 US for 119.40 JPY and/or sell it at 119.30 JPY. On leverage 100:1 or 1%, the trader starts buying a lot of 100, 000 USD for 119, 4000 JPY which means that the initial margin deposit for this trade would be = $1000 USD. As expected, the rate now increases by 30 pips making USD/JPY = 119.60/70. The deal is closed by selling the US Dollars at the rate of 119.60 JPY yielding 119, 6000 JPY thus making a total profit of 2000 JPY. =>P&L (in terms of USD) = 2000/ current USD/JPY rate = 2000/ 119.60 =>Return on Investment = $16.72
The second step describes the powerful features of the FOREX trading system. The leverage & margin are the major features helpful in drawing the attention of the traders because these increase the buying power of the traders. ''The leverage allows the trader to expect high returns on investment (ROI) on even small market movements and it also utilizes less money to trade'' [4]. On the other hand, margin in forex allows the investor not to pay any interest to the amount lender on the amount borrowed for the trade. In forex, margin is the minimum amount needed to place the trade. This can be the initial amount with which the forex trading account was opened. The example below helps in explaining the concept in detail:- Supposedly, The balance in the account (trader’s) is = $10000 and the US dollar measured to be as undervalued against the JPY. Now, to place a trade investor has to buy USD by selling JPY and wait till the rate increases. Assuming the current bid/ask price for USD/JPY = 119.30/119.40. This means that the trader can buy $1 US for 119.40 JPY and/or sell it at 119.30 JPY. On leverage 100:1 or 1%, the trader starts buying a lot of 100, 000 USD for 119, 4000 JPY which means that the initial margin deposit for this trade would be = $1000 USD. As expected, the rate now increases by 30 pips making USD/JPY = 119.60/70. The deal is closed by selling the US Dollars at the rate of 119.60 JPY yielding 119, 6000 JPY thus making a total profit of 2000 JPY. =>P&L (in terms of USD) = 2000/ current USD/JPY rate = 2000/ 119.60 =>Return on Investment = $16.72
Step Three
This step allows user to get familiar with the e-trading using FOREX softwares. The explanatin is provided by using one such software called FX'x GTS. The self-explanatory figure explains a practical knowledge of some terms discussed earliers. The currency pair which has to be bought or sold can can done simply by a click on the sell or buy button in front of that currency. On selection, a quote is prepared and dislplayed in the bottom section for the user to keep a track on. The software also provides some attractive powerful features which allows to add stop/limit and Hedge actions thus making trader constantly aware of his trade.
This step allows user to get familiar with the e-trading using FOREX softwares. The explanatin is provided by using one such software called FX'x GTS. The self-explanatory figure explains a practical knowledge of some terms discussed earliers. The currency pair which has to be bought or sold can can done simply by a click on the sell or buy button in front of that currency. On selection, a quote is prepared and dislplayed in the bottom section for the user to keep a track on. The software also provides some attractive powerful features which allows to add stop/limit and Hedge actions thus making trader constantly aware of his trade.
Step Four
This step is furter explanation to the G.T.S software. The trader can select various other currency pairs upon which the trade can be made. The left middle section shows the account details of the account holder i.e. balance, leverage, equity,margins and used margins. The other features which can be seen in the software are session activity, G.T.S charting and latest news that makes the trader aware of latest happenings.
This step is furter explanation to the G.T.S software. The trader can select various other currency pairs upon which the trade can be made. The left middle section shows the account details of the account holder i.e. balance, leverage, equity,margins and used margins. The other features which can be seen in the software are session activity, G.T.S charting and latest news that makes the trader aware of latest happenings.
Step Five
References:
References:
Before doing the FOREX trade, an analysis should be carried out to decided which methodology best suits the trader. The forex analysis can be done by using either ''forex technical analysis'' or ''forex fundamental analysis''. The technical analysis focuses on the price action of the market and is a very resourceful when it comes to short-term trading. It analyses the market data and previous history trends based on which a new decision is made. The technical analysis believes that methodologies with proven records are the basics of the forex for forecasting the future price movements. On the other hand, the fundamental analysis attempts to predict the future values by using the past core government policies, economic indicators and other fundamental signals. It generally creates a model which can be used by the trader to formulate the trading strategy that best suits him.
Out of the two, the best successful known analysis is the technical analysis concentrating mainly on the short-term trades and delivering high profits based on the analysis. The various data and information is analyzed by technical analysis thus behaving as a DSS (decision support system)
Though there are many advantages of forex over the stock and other markets but investment in these markets involves several kinds of high risks. So, until and unless an individual has good sound knowledge i.e. both practical and theoretical, the trading in these markets is not recommended.
