Trading on the Forex market is simply an exchange of money from one currency to another. For example, if you lived in Spain and you wanted to buy a product in the USA then you would have to pay in US dollars. This transaction would then pass through the USD/EUR Forex exchange at the current exchange rate and your credit card would be charged in Euro. This is all the Forex markets are - they are a market for foreign exchange rates.
For example, trading on the Forex market allows you to map the US Dollar against the Canadian Dollar, or the Euro against the British Pound or even the Australian Dollar against the Swiss Franc. There is literally a Forex market combination for almost every currency.
The thing with trading global forex currency exchanges is that they never remain stable but fluctuate. For example, if you have travelled overseas then you would be aware that the exchange rate will fluctuate throughout your holiday. As a Forex trader you are aiming to make money on those movements. In a way, trading on the Forex market is similar to trading on the stock market however instead of trading stock you are trading on the rate of one currency against the other. In short you are aiming to make money on both movements up as well as movements down.
You may be wanting to know the major trading players on the Forex markets are - these are anything from hedge funds, commercial banks, industrial banks, financial firms, fund managers, travellers checks, brokers, large corporations and down to us, the individual investor. The larger institutions are literally trading with billions of dollars per day but there is nothing stopping the individual from also trading on the Forex markets. Now I wouldn't suggest trading on the volatile markets around the world because the bottom can literally drop out of a volatile currency virtually overnight - such as with the Argentinian Peso.
The major Forex trading markets around the world are typically the US Dollar (USD), the British Pound (GBP), the Euro (EUR), Canadian Dollar (CAD), Australian Dollar (AUD), Swiss Franc (SFR) and the Japanese Yen (JPY). These are the strongest currencies on the world Forex markets and are therefore relatively stable.
Forex Trading Online
Just like the stock market, you will need a few tools on the online Forex trading platform. Firstly you will need a computer system, an internet connection, a broker and a good charting software package. Once you have these tools, knowledge about the Forex market and an effective strategy then you will be ready to trade on the Forex markets.
System - firstly you will need a computer powerful enough for trading
online with the Forex currency. Now this doesn't mean that you have to
rush out and buy the world's best computer - simply put this is a waste of
your money because you don't need it. If you do go out and buy the best
computer with the fastest chip, then 3-4 months down the line you will
find it is already outdated. Not only that but you'll find that the
computer you had just bought will have fallen by 30%- 40% in value.
As you are probably aware the most common operating system is Windows. The only problem is that Windows 98 often crashes, especially if you have more than one application open at a time. For this reason, if you are serious about trading the Forex markets online then you will need an operating system above Windows 98.
When trading it does pay to shop around when looking for a Forex broker as they all offer different services. The main service you will need from your Forex broker on the currency markets is reliability. If your brokers system has a tendency to go down as this can cost you a lot of money and wasted time. For example, if you are in the middle of a trade and your brokers system goes down then you may not be able to exit a trade. If the market moves against you then all you can do is look at your portfolio slowly whittle away and there is nothing you can do about it.
You also want to choose a Forex broker with a quick and accurate execution speed. All this means is that as soon as you see the entry signal, you want to be able to get in to the trade. Therefore you want to choose a broker that can execute your order not just quickly but accurately.
Forex brokers will also vary in the quotes that they give on their screens. What you should look for is a broker that gives reliable quotes, in that what you see on your screen is what your broker will charge you at. I keep harping the point but not all brokers offer the same level of service.
The final thing you should look for in a Forex broker is good technical support, so that if you run into problems using their system then they can fix the problem quickly. A dedicated technical support desk is a good trait to look for in a broker.
The other service which most Forex brokers offer is charting software. Some will expect you to pay a monthly fee for using their software however there are a number of brokers which will offer free charting software. The problem with most of the free charting software products is that they are often too basic for your needs to trade the Forex markets. For paper trading these charting packages may be adequate but if you want to trade the Forex markets seriously then you will need to have access to better charting software packages.
At the end of the day you will need to do your homework when choosing a Forex broker, but as long as you find a broker that you feel comfortable with that also offers a reliable system, good quotes, quick and accurate execution, a dedicated technical support desk and adequate charting software then you should be on a winner.
Forex Trading System
Now that you have learnt about the basics of trading the Forex markets what you now need to learn about money management. Money management is simply a Forex day trading system that aims to protect your capital. I realise that you are wanting to trade the Forex markets to make money, but the best way to make money long term on the Forex markets is to preserve your capital. The reason for this is that at the end of the day it's not really how much you make it's about how long you stay in the game. The longer you stay in the game, the more likely it is that you will make money. You simply become a better trader. Therefore, the number one objective is to preserve your capital base through an effective Forex day trading system.
As an example, just say that over time you lose 50% of your capital. You would then need to make 100% on your following trades just to break even. This is a pretty difficult thing to do in a market where 95% of people lose money. The smartest thing to do is to not lose your money in the first place - that should be your number one goal through following a forex trading system.
It also goes without saying that you are not going to play with money that you can't afford to lose. For example, it is not a good idea to trade on the Forex market with money that you are putting away for your kids education. The number one rule with following a Forex day trading system is to only use money that you can afford to lose. The main reason is because you will be able to make clear and decisive trading decisions based on your rules, rather than trading with emotion. If you are trading with money that you can not afford to lose then your trading decisions will be affected by your emotions.
Another good Forex trading system money management technique is to spread your money over a number of different currencies. For example, if all of your money is on the one trade and that trade goes against you then your entire portfolio will suffer. However, if you spread your money across a number of different currencies then you will lower your risk. The more currencies you spread your portfolio over the lower your risk level will be.
final Forex trading system money management technique is to only risk
5% of your capital on any one trade. The reason for this is capital preservation.
For example, if you have a $10,000 portfolio then you are going to only
risk $500 on any one trade. So, if you are using good money management
skills you may have spread your portfolio over two different currencies
- the USD/EUR and the GBP/EUR for example. Therefore if your portfolio
is spread equally then you would have $5,000 on each trade. If you are
only risking 5% on any one trade then you would exit when your trade value
was $4,500 - 5% on any one trade. The reasoning behind this is to cut
your losses short and let your profits run. It is called capital preservation
and will keep you in the game until you learn enough to be in the top
5% of traders which make serious money.