Forex Trading Basics

Forex trading has really grown in the last decade. Today the foreign currency exchange market is one of the most active around.  As in all markets, traders must do their research and homework before even attempting any real trading. To dive in before fully understanding not only the fx market but its history and terminology can be a recipe for disaster.

Foreign Exchange is often abbreviated as Forex and fx and deals with the trading of international currencies. As with any market,  a good amount of knowledge and analysis is required before any large investment is made. The Forex market has become  popular with traders due to high liquidity and low transaction costs.

The Forex market is very risky to the newcomer. With promises of high return inflating expectations, newcomers fail to do the needed research and training needed to turn a profit. Many new traders get distracted from the facts and follow their “gut instinct” which proves unreliable in the long run.

Yes, many traders have turned some profit on instinct alone, but that model is not sustainable and will prove to be their downfall down the line.

Forex is a multi trillion dollar market where 80% to 90% of investors consistently fail to turn a profit or break even. The other 10% to 20% due well. So, what makes the difference between consistently failing or gaining? Experts agree that its training, patience, methedolodgy, available funds and maybe a wee bit of luck.

The first thing that new traders need to do is let go of the unrealistic expectations that the internet trading age has brought upon us. Yes, there are a few cases where people made a killing overnight but the chances of that happening to you are as good as winning the lottery. You already came to the realization that you will not win the lottery tomorrow, so come to the same realization with Forex. You are not that lucky… or at least most of us are not.

Next, develop a clear understanding of the changing market and create your own methedology behind when its time to buy or sell. You must learn to spot the signals.  Those signals are not always clear and it takes time to fiigure out when you are right and wrong.

Be patient, trading is like gambling in many ways and overcome the urge to just buy, buy, buy, just to do it and stay in the game. Unless you have thousands to throw away, it’s not a game, it’s an investment. Learn to see it as so and not a impulsive gamble as many do. Wait for the right time. Market trends are short. In any market, in most years, there are only a few great opportunities. Watch market trends carefully, and use that knowledge to pick the best time to trade.

Lastly, keep your risk small. Remember that it is always a risk and you only want to risk a few percent of your portfolio. For any trade your stop points need to be realistic when compared to your portfolio size. Any trade above 5% to 10% of your trading portfolio may be too much of a gamble. Remember that pro-traders do not trade over a few percent of their portfolio value.  Limit your risk to 1% to 5% or less, so failure in a ceratin transaction does not put you “out of business” so to speak.

What is Forex, fx or 4x

4x currency trade definition

In a nutshell forex, fx and 4x are all terms that relate to the foreign exchange market.

The Forex (4x) market is where traders trade in currency and banks buy and sell foreign currency.

Normally, the 4x currency trade involves exchanging one countries currency for anothers or more like paying for so much of one countries currency with anothers.

The foreign exchange market that we see today started changing for investors when many countries changed to a floating exchange rate

The Forex  market is huge and one of the most liquid financial markets in the world. The traders on the Forex market include everyone from Governments, large institutions to individuals.   In 2007 The daily volume of the Forex (4x) market was known to be 3.2 trillion^{. In addition, the forex market has kept up its growth and between 2007 and 2008 had a estimated growth of over 40%}

The way investors are profiting from the forex market is by speculating on a countries currencies worth in the near future.

As you know, currency is not equal and what the US dollar is worth goes up and down relative to other currencies. Investors analyze these daily gains and losses to make money from the forex market. If a countries currency drops, that means you can exchange less of your own currency for their currency, if it goes back up, you just made money because you exchange it back at a higher price.

Take a look at the graph below from x-rates. This is the graph for Euro VS. US. You can see the fluctuations and where the Euro dropped dramatically, then came back. Savvy investors may have made a great profit on that.

Euro vs US

As you can see the 4x market can have large fluctuations in small periods of time, that is part of the reason that forex has become so hot in the last few years. Investors, banks and companies speculate on which way a countries currency is heading and invest in that currency just to exchange it back for more than they got it for.