Albrata finance

What is Forex?

A brief history of Forex.

“Forex” is an acronym for Foreign Exchange. It is a market where people exchange one country’s currency for another country’s currency. It is called the cash market or spot market. The spot market means trading right on the spot at whatever the price is at the moment the transaction occurs. This market was established in 1971 as was previously mentioned. The Forex market is the arena in which the currencies of countries around the globe are exchanged for one another. Payments for import and export purchases and the selling of goods or services between countries all flow through the foreign exchange market. This part of the Forex market is called the consumer Forex market and this is where the majority of the daily volume takes place. Prior to 1994, the Forex retail interbank market for small individual speculative investors or traders was not available. A speculator investor is one who looks to make the profit on price movements and is not looking to hold onto the currency for the long haul. With the previous minimum transaction size, the smaller trader was excluded from being active within the market. In the late 1990s, retail market maker brokers (i.e. Forex Capital Markets/FXCM) were allowed to break down the large interbank units in order to offer individual traders the opportunity to participate in the market. The Forex market is the largest financial market in the world. The term “market” refers to a location where buyers and sellers are brought together to execute trading transactions. Nearly $4 trillion is traded on the Forex daily. To give one a perspective of how big this market is, consider the following: $300 billion each day is traded on the U.S. Treasury bond market and $100 billion is traded on the U.S. stock market every financial day the market is open. That is a total of $400 billion per day. The Forex trades almost ten times that volume. The Forex marketplace has no physical location. It is comprised of an electronic medium where transactions are placed automatically through the Internet or via telephone. It is comprised of approximately 4,500 world banks and retail brokers who all monitor current prices, as they constantly change, and who execute transactions for their clients. Individual traders wanting to capture profit by speculating on price changes get access to the market through a Forex broker.

The Introduction of the Euro

Though Europeans were already very comfortable with the concept of Forex trading, this trading arena was still unfamiliar territory to the rest of the world. The establishment of the European Union later gave birth to the euro in 1999. The euro was the first single currency used as legal tender for the member states in the European Union. It became the first currency able to rival the historical leaders such as United States of America, Great Britain, and Japan in the foreign exchange market. It created the financial stability that Europe and the Forex market had long desired.

Advantages of the Forex Market

Liquidity

In the Forex market, there is a buyer and a seller. The Forex absorbs trading volumes and per trade sizes which dwarf the capacity of any other market. On the simplest level, liquidity is a powerful attraction to any investor. It suggests the freedom to open or close a position, whenever you would like during market hours. Once purchased, many other high-risk, high-return investments are difficult to sell at will. Forex traders don’t have to worry about being “stuck” in a position due to a lack of market interest. In the nearly $4 trillion per day market, major international banks have bid (buying) and ask (selling) prices for currencies.

Access

The Forex market is open 24 hours a day from about 5:00 pm ET Sunday to about 5:00 pm ET Friday. An individual trader can react to news when it breaks rather than having to wait for the opening bell other markets have which creates a situation where everyone else has the same information. This timeliness allows traders to take positions before the news details are fully factored into the exchange rates. High liquidity and 24-hour trading permits market participants to enter or exit positions regardless of the hour. There are Forex dealers in every time zone and in every major market center: Tokyo, Hong Kong, Sydney, Germany, London, the United States, and Canada willing to continually quote buy and sell prices. Since no money is left on the market table, this game is referred to as a zero sum game or zero sum gain and, if the trader picks the right side, money can be made.

Two-Way Market

Currencies are traded in pairs. For example: euro/ U.S. dollar (EUR/USD), U.S. dollar/yen (USD/JPY), U.S. dollar/Swiss franc (USD/CHF), just to name a few. Every position involves the selling of one currency and the purchase of another. If a trader believes the Swiss franc will appreciate against the U.S. dollar, the trader can sell U.S. dollars and buy francs. This position is called selling short. If one holds the opposite belief, that trader would buy U.S. dollars and sell Swiss francs, which is called buying long. The potential for profit exists because there is always movement in the exchange rates or prices involved in these transactions. Forex trading offers the opportunity to capture pips from both rising and falling currency values. In every currency trading transaction, one side of the pair is always gaining value and the other side is always losing value.

Leverage

As a recap, trading on the Forex market is done in currency lots. There are three types of lots: micro, mini, and standard. A micro lot is approximately $1,000 worth of a foreign currency. A mini lot is approximately $10,000 worth of a foreign currency. A standard lot is approximately $100,000 worth of a foreign currency. To trade on the Forex market, you need a margin account, which can be established through a brokerage firm. This equates to an investment account into which profits will be deposited and from which losses will be deducted. These deposits and deductions are made instantly upon exiting a position. Different brokers around the world have different margin account requirements and perhaps different regulations due to the country they are operating within. Many require as little as a $100 deposit into the account for a micro account, $1,000 deposit for a mini account, and $3,000 for a standard account. In comparison to trading stocks and other markets (which may require approximately a 50% deposit into the margin account), a Forex Speculator trader gets excellent leverage of 1% to 4% of the margin value. For example, a $2,000 deposit in the margin account can control $100,000 worth of currency, which means the trader can control each lot for one to two cents on the dollar.

Execution Quality

Because the Forex market is so liquid, most trades can be executed at the current market price. In all fast-moving markets (such as stocks, commodities, etc.), slippage is an inevitable consequence of trading. In the Forex slippage may be avoided with some currency brokers' software that informs you of your exact entering price just prior to executing the trade. At that point, you are given the option of avoiding or accepting the slippage. The Forex market's huge liquidity offers the ability for high-quality execution with less opportunity for slippage to occur. Trade confirmations are immediate and the Internet trader can print a copy

Focus

Instead of attempting to choose from more than 50,000 products in the stock, bond, mutual fund, or commodity markets, Forex traders generally focus their efforts on one to six currencies. The most common and most liquid currencies are the U.S. dollar, Japanese yen, British pound, Swiss franc, Euro, and Canadian dollar. Highly successful traders tend to focus on a limited number of investment options. New Forex traders will usually focus on one currency pair and later incorporate one to three more currency pairs into their trading activities.

Margin Accounts

Trading on the Forex requires a margin account. You are committing to trade and take positions on the day you trade. As a speculator trader, you will not be taking delivery on the product that you are trading. As a stock day trader, you would only hold a trading position for a few minutes up to a few hours and then you would need to close out your position by the end of the trading session. All orders must be placed through a broker. To trade stocks, you would need a stockbroker. To trade currencies, you will need a Forex currency broker. Most brokerage firms have different margin requirements. You need to ask the brokerage firm of your choice about their particular margin requirements. A margin account is nothing more than a performance bond. All accounts are settled daily. When you gain profits, the brokerage firm places your profits into your margin account that same day. When you lose money, your losses are removed from you margin account on that same day. A very important part of trading is taking out some of your winnings or profits. When the time comes to take out your personal gains from your margin account, all you need to do is contact your broker and ask them to send you your requested amount. They typically will send you a check, credit your payment card, or wire transfer your money.

Execution Costs

Unlike other markets, the Forex generally does not charge commissions. The cost of a trade is represented in a bid/ask spread established by the broker. This typically equates to approximately one to four pips per trade depending on the currency pair being traded. Each broker has their own schedule for fees, spreads, and/or commissions.

Trends

One reason thousands of traders are gravitating to Forex trading is due to the fact that it is a trending market. Historically, currencies have demonstrated substantial patterns and identifiable trends. Each individual currency has its own “personality” and offers a unique, historical pattern of trends that provide diversified trading opportunities within the spot Forex market.

Equity Management

Protect Yourself First with Every Financial Opportunity!

Let me ask you some questions:
1. What is the biggest loss you have taken while trading the markets?If you have never traded in the markets, what is the biggest loss you have taken in an investment or a business opportunity?
2. What was your emotional experience during that event?
3. What went through your head and heart during that event?
4. Were you in emotional control or was your destructive ego in control?
5. Was it worth it?
6. What did you learn from that experience? (This is important because if you did not learn anything, you will probably repeat the same actions and endure the same consequences again.)
7. What new disciplines have you now implemented when you invest or trade due to what you have learned from that event?

For some reason many people think something magical is going to take place in the Forex market and “poof,” they will become rich. They are not trading with any intention to understand the market and why it moves the way it does. As a matter of fact, they believe there is nothing to be understood (and they are very wrong). They may say that the market is simply mysterious and it just works the way it does without rhyme or reason. As much as I hate to be the bearer of bad news, I must inform you that this is far from the truth.

Hopefully, you have been paying attention as you read this e-book and realize that the trading chaos that exists in the markets can be understood. My discoveries in the Forex market and how I have simplified them have altered the lives of countless people around the world. I really wanted to name this book “When I trade, I may lose, but don’t count on it.” The Forex market is not a mysterious or magical place. It can be figured out and people can make money over and over again as they come to this realization. You can trade strategically because the market and its movements can be understood - you just have to know what to look for. If you have already tried your hand at Forex trading, let me ask you this question: Did you try to outsmart the market by not protecting yourself and trading without stop loss orders? If so, how many pips did the market move against you? One hundred pips? Two hundred pips? Are you embarrassed to say? Did the market move back to your entry point or were you liquidated? If it came back in your financial favor after working against you, did you continue to stay in to capture hundreds of pips worth of profit by keeping your risk/reward ratio intact? Or, were you so traumatized and emotionally beat up that when it came back, you were just grateful and happy to get out by breaking even, or with only a handful of pips worth of profit, in fear that the market would take it all away again?

Always Protect Yourself

If you take nothing away from this e-book, please understand that there is no excuse for not protecting yourself while currency trading. You always protect yourself when you drive by wearing a seat belt, driving undistracted, etc. You always protect yourself when you are on vacation. You always protect yourself when you are swimming in oceans, rivers, and lakes. You always protect yourself when you enter into a relationship. You always protect yourself when you lend money to your friends and family. When you invest in the Forex market or in any trading avenue, you should always protect yourself – period! Successful traders have learned to always protect themselves when they trade. Protecting yourself as you trade can be done by placing a protective stop loss order in the market at the time you execute the trade. Protecting yourself as you trade is quantifying how much you are willing to lose before you enter the trade to ensure that you do not lose more than that amount. To sum it up, if the trade does not work out according to your plan, you should be able to emotionally and financially survive without that loss substantially affecting anything in your life. Protecting yourself at all times, and in every trade, needs to become a subconscious habit. It should become every bit as mindless as avoiding walls when you walk. Never trade without looking at the downside first or the opposite side of the risk you are taking. You should never trade without asking yourself, “If this trade does not work out, can I afford to lose X amount of money?” Protect yourself at all times and if you take a financial loss, don’t take it personally. Emotions control most traders and when you let your destructive emotions get involved, it may become hard for you to make any money as a result of your trading efforts. As you trade, you must never forget that security in the market is a myth. It does not exist. Trading without protective stop loss orders is outright exposure to financial self-destruction. Trading without a protective stop loss order is a bad habit to begin. It is when you don’t protect yourself that you will open a door to one of the scariest rooms you will ever walk through in your entire life. As you learn to trade and get a little experience coupled with successes under your belt, you’ll step into an arena of false security. That is why people drown in the ocean. They swim with insufficient respect and knowledge about what the ocean can do (a false sense of security) based on a feeling. They have the feeling that they are greater than the force of the ocean and it is at this point that they drown. The sad part is that the ocean meant to do no harm. It was just doing what it does. It was simply carrying on as it always has. Like the ocean, the market exists with no feelings. Without the proper knowledge and respect for the market, you too can drown from a financial standpoint. And if you do drown, the market will feel nothing! Why? It can’t feel and it can’t care. As I have pointed out, it is a part of nature and it does not have any emotions.

Fear always springs from ignorance.” -Ralph Waldo Emerson

Trading without a protective stop loss order is being ignorant to the realities of the damage the market can do to you psychologically, emotionally and financially. If you enter the market without protecting yourself first, you are the perfect candidate for a catastrophic, life-altering event in your trading career. I want you to know that this holds true for both novice and experienced traders alike. There are unforeseen events like the September 11th terrorist attacks which unexpectedly moved the currency market 500 to 1,000 pips in an unplanned direction. Although these instances do not occur every day, fundamental announcements occur often. Like increases or decreases of interest rates after the U.S. Federal Reserve or a bank holds a secret meeting about the economy. These announcement results can change market direction rather quickly. This is why your protective stop loss order is so very important in helping you achieve your vision of Forex success, by protecting your trades and emotions.

Setbacks and failures are a part of life. What we don’t want is a setback so devastating that it changes our lives forever. This illuminates the true value of the protective stop loss. When it is time to execute a trade, you can never really quantify how much you could make in a trade, however, you can always quantify the largest amount you are willing to risk or lose in a trade should the trade not go your way.