With the increasingly widespread availability of electronic trading networks, trading on the currency exchanges is now getting hotter than ever. The foreign exchange market, FX or Forex, is previously the domain of government central banks and commercial and investment banks, not to mention hedge funds and massive international corporations. Now it has been the playground of many highly addictive punters. Forex market offers trading 24-hours a day, five days a week, and the daily dollar volume of currencies traded in the currency market exceeds USD 2 trillion, making it the largest and most liquid market in the world. In Malaysia, Forex trading has been explosive since the last twelve months in tandem with the government liberalisation of the foreign exchange accounts. More and more traders and man on the street are seduced by the merits and promises of Forex, rightly or wrongly, as compared to the other much slower financial markets. Among the killer merits of Forex trading are Forex offer zero trading commision, maximum leverage up to 500, minimum starting capital as low as USD50, minimum margin as low as 50 cents per lot, superior liquidity, 24 hours market, generally no gaps trading, automatic trading by computers, broad diversication up to 150 world currencies and finally super efficient no dealing desk (no market maker and sucker) execution. Investors and traders are attracted to the Forex market simply because of these merits. The question now is, are they able to trade in the market successfully, and if they enter the market, how long does it take for them to achieve their aim?
Based on research by Forex brokers, only 5% of the traders achieve consistent profit results, 90% totally lose their money and the other 5% operate at break even point. From this statistics, it can be realized that it is very difficult to trade the Forex market. It is difficult as well, trying to get to the top of other endeavors like writers and musicians and even other businesses. Comparatively, the success rates are almost the same. Despite the fact, many traders became victims to several ponzi forex schemes who claimed that they can made a hefty 100% a month or even a week !!
Before delving further into the realities of Forex, it is important to know some basic concepts of Forex. What is traded in the Forex market? The instrument traded by Forex traders and investors are generally currency pairs, which is the exchange rate of one currency over another. The most popular traded currency pairs are:
EUR/USD: Euro Against Dollar
GBP/USD: Pound Against Dollar
USD/CAD: Canadian Dollar Against Dollar
USD/JPY: Yen Against Dollar
USD/CHF: Swiss Franc Against Dollar
AUD/USD: Aussie Dollar Against Dollar
Although it is possible to trade exotic currencies such as Kenya Tenge and Iraq Dinar, they are not advisable for novice traders as it involved high degrees of volatility and speculation. Note that the first and second currencies quoted of each pair are known as the base and counter (quote) currencies respectively. Each pair is expressed in units of the counter currency that is needed to get one unit of the base currency. About 85% of the entire volume generated in the Forex market is generated by these currency pairs. If for example, a trader goes long or buys the pound, he or she is at the same time buying the GBP and selling the USD. If he or she goes short or sells the Yen, he or she is at the same time selling the JPY and buying the USD.
Using 1.325CHF to get one USD means that the price or quote of the currency pair USD/CHF is 1.325.
Bid/Ask Spread
Currency pairs always come with bid and ask price; the bid price is always lower than the ask price. Bid price is the price one’s broker is willing to buy at and the trader should sell at. On the other hand, the ask price is the price one’s broker is willing to sell at and the trader should buy at.
For example, if we have GBP/USD 4.321/23 or 4.321/3;
Trader will sell at the bid price which is 4.321
Trader will buy at the ask price which is 4.323
A Pip
Pip is the acronym for “price interest point” and it is the lowest incremental move a currency pair can go through. For example, a move in the USD/CAD from 1.723 to 1.731 equals 8 pips and a move from EUR/USD from 107.23 to 108.24 equals 1.01 pips. Generally speaking, a pip is worth between USD6 to USD10 depending on the currency pairs traded.
Margin Trading (Leverage)
As opposed to other financial markets where the full deposit of the amount traded is required, in the case of Forex market, only a margin deposit is required. Your broker will grant the rest.
Some brokers such as InterbankFX, MigFX and NorthFinance can provide leverage up to 400:1 which means that you need only 1/400 or .25% in balance in addition to floating gains/losses. Most brokers however offer 100:1 for which every trader requires 1% in balance to open up a position.
For example if a trader wants to get long one lot in EUR/USD and he/she is using 100:1 leverage, he/she requires 1% in balance or $ 1000 USD, that is,
1/100 × $ 100,000 USD = $ 1000 where $ 100,000 is the standard lot size in the Forex market.
Traders however are cautioned that high leverage can be a double edged sword. If one opens a position with limited funds in our trading balance and the trade goes against our trader, the broker has to close this position. Hence, it is advisable not to open a position with limited funds. This leads us to the term known as Margin Call.
Margin Call
This normally occurs when money management is misapplied resulting in the balance of the trading account falling below the maintenance margin, that is, the capital required to open one position , 1% when using the leverage of 100:1 or 2% when using the leverage of 50:1 etc. Theoretically, the trader is left with only the maintenance margin when the broker sells off or buys back, in the case of short positions, of all their trades. It is important that traders have sufficient capital to withdraw any temporary gyration in trading the Forex market.
For example, let’s take a case of a trader who has analyzed the market and decided that there is a higher probability for the British pound to go up. If he decides to go long risking 30 pips and having a target or reward of 60 pips and the market goes not in his favor, he will loss 30 pips. Conversely, if the market goes in his favor, he will gain 60 pips.
Assuming the actual quote of the pound is 1.8524/27, 3 pips spread and the trader gets long at 1.8530 which is the ask price; the time the market gets to either his target, that is, “take the profit order” or his risk point, that is, “stop loss level”, he will be compelled to sell it at the bid price, the price his broker is willing to buy his position back. To be able to make 60 pips, he should place his take profit level at 1.8590 bid price. If he is able to hit the target, the market ran 60 pips, that is 60 pips after accounting for the initial 3 pip spread. On the other hand, if his stop loss level is hit, the market ran 26 pips against him. Before one can adventure in a live trading account, it is very necessary for one to master every single aspect of it by starting from the very basic concepts and then proceed to the more complex issues like Forex trading systems, trading psychology, trade and risk management.
A few charts below highlighted some excitement of trading Forex with low margin and high leverage :
EUR/USD currency pair moved from 1.3347 to 1.3435 giving 88 pips or USD880 profit in three hours (88% profit on a standard lot account) !!
EUR/USD Hourly Charts (Courtesy from www.interbankfx.com)
GBP/USD fell from 1.9680 TO 1.9635 giving 45 pips or USD450 profit for traders who short the pair within 15 minutes !!
GBP/USD 15 Minute Charts (Courtesy from www.interbankfx.com)
AUD/USD fell from 0.8118 to 0.8064 giving traders who short the pair, 54 pips or USD540 profit in five minutes !!
AUD/USD 5 Minute Chart (Courtesy from www.interbankfx.com)
USD/JPY spiked from 118.83 to 119.14 giving 31 pips or USD300 pips profit for traders in just a single minute !!
USD/JPY 1 Minute Chart (Courtesy from www.interbankfx.com)
Characteristics Of Successful Traders
It is clear now that it is not easy for one to achieve huge profit in a highly leveraged instrument such as Forex. Another question that arises is that, why are some traders able to move to the top whilst others lag behind? The answer to this question is not far fetched. What is known is that, these successful traders think and behave differently towards their businesses as compared to the others. Generally, they have the following characteristic which accelerate the success rate of Forex trading, namely:
Ø Education: successful traders have in-depth knowledge and experience about what they are doing and avail themselves to learn every little thing about trading. They humbly approach the Forex market as an ordinary business which requires hardworks and dedication.
Ø Forex trading system: successful traders have devised a strongly backtested Forex trading system, and they follow it diligently with discipline knowing the higher success rate in the past attached to trades conducted through such systems.
Ø Price behavior: successful traders know the importance of reliable price action before currencies explode, they have included such price behavior in their trading system before pulling the trigger.
Ø Money management: successful traders know forex is money and odds game, they avoid the risk of ruin, by betting small and managing their money properly.
Ø Trading psychology: successful traders know that the outcome of every trade is either winning or losing can impact their spirit, they have kept themselves informed of every psychological issue affecting decisions made by traders. They understand that occassionally they have to stomach big losses before taking even bigger profits.
Though it is possible to make huge money by trading the Forex market, it is not as easy as one may think. The length of time for which one realizes consistent profit results differs from one trader to another. In some cases, it can take a shorter period (less than three months) to achieve this while in other cases; a trader can struggle through a long period of time (up to five years) but will still not achieve this feat. Finally, research shows that all successful traders made losses in the early trading stage. Hence, all novice traders must understand that losses are part of trading game. Successful trader Ever Klipp famously said “you must love to loss money and you must hate to make money to be a successful trader. In other words, you have to overcome your humanness,” Instead of viewing losses as a threat, treat them as a crucial part of trading. What Ever Klipp believe is that taking a loss improves a trader’s self-discipline and self-control in the subsequent trades. To summarize, trading successfully in the Forex market is a very difficult task as this is a lengthy process which can take a long period of time to bring a trader’s effort to fruition. Nevertheless, if a trader accustoms himself to the characteristics above, the learning curve should be shortened significantly. Bear in mind, Forex trading is not an overnight get rich quick scheme. It should be regarded just like other career which should take years to complete a bachelor degree, perhaps additional few years to complete a master degree, another few months to go through probation and finally another few years to be a proven practitioner master.
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