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FOREX TRADING INFORMATION
Below you will find information on Forex Trading.
What is Forex?
'Forex' is another word for 'Foreign Exchange', and is mostly used by people who deal with the Foreign Exchange Market. The Forex market is the largest liquid market in the world with a daily turnover in excess of USD 1 trillion. It is accessed by millions of investors around the world and as such, it rarely sleeps. It is divided into world sessions, and while one or two are awake and busy trading, the others are fast asleep on the other side of the world.
Here is how they are categorized (times shown in local time Sydney Australia):
- Frankfurt Session (Germany) – opens 06:00PM, closes 02:00AM
- London Session (Great Britain) – opens 07:00PM, closes 03:00AM
- New York (United States) – opens 12:00AM, closes 08:00AM
- Sydney Session (Australia) – opens 08:00AM, closes 04:00PM
- Tokyo Session (Japan) – opens 10:00AM, closes 06:00PM
So, the market within each area is open between 08:00AM and 04:00PM in local time. Each trading day begins in Sydney and continues as each business day opens around the world.
The Forex market is the only 24 hour market. Currencies are bought and sold in pairs (AUD/USD) because for the investor, the return is the relative exchange value of one currency against another. The exchange rate is a floating one (it changes on a frequent basis depending on trade volumes).
Is there a central exchange for the Forex market?
No; there is central location for trading on the Forex market. A large amount of trading takes place between the largest banking corporations – they deal with large transactions for large governments and firms – and that is known as the interbank market.
Trading can also take place between any two parties over the internet or via the telephone – 24 hours a day. Most individual traders (sometimes referred to as 'retail traders') buy and sell via a broker or dealer. The Forex market itself is not regulated (though all brokers/dealers and banks are tightly regulated) and can be described as an Over the Counter (OTC) market. Some people refer to the Forex market as the 'forex spot market' which can make others mix it up with futures or options. However, the forex market is not within the futures or options market.
Who trades on the Forex Market?
Many different entities trade on the foreign exchange market. Traditionally, it was mainly used by large banks (central banks, investment banks and commercial banks) but now used by individual (also retail or private) investors, brokers, futures and options traders, speculators (who trade currency derivatives) and international currency exchange companies.
Which Currencies are most Commonly Traded?
Alongside the Australian dollar (the Aussie), the most popular currencies include the US dollar, the British Pound, Euro, Japanese yen, Canadian dollar and the Swiss Franc.
The majority of forex transactions each day involve those major currencies. You might notice that these all belong to countries which have stable political climates, efficient central banks and generally a low rate of inflation.
What is Margin?
Margin is the collateral for a forex position. So, if the market moves against your position, your broker will request for more funds – this is called a 'margin call.' They will close any positions you have open if there are insufficient funds.
What is a long and short position?
If you buy a currency with the intention of selling it at a later date (for a higher price), you have opened a long position. Reversely, if you sell a currency in anticipation of it going down in value, you have opened a short position – thereby you are still intending to profit from a declining market.
What Affects Currency Prices?
Anyone can view currency rates by looking at a currency chart on the internet. You will notice that currency prices on the Forex market are always fluctuating – in other words, rising and falling in value. Why? The main reason is that a variety of factors can affect the value of a currency, mainly political and economic events (planned or unexpected). Central interest rates and inflation also affect currency movements.
Central banks or governments can even try to influence the value of their currency, by either buying it to raise its price or flooding the market with new currency in order to lower its price.
Because the Forex market is so large, it is impossible for any one factor to affect the price of a currency one way for any length of time.
Currency prices tend to move according to trend (unlike the stock market) and fluctuations can repeat themselves. Experienced traders can recognize various trends and patterns, and use these to aid their 'buy' and 'sell' decisions.
Can you manage Forex Trading Risks?
Not surprisingly, Forex traders put their money at a certain level of risk due mainly to the frequent fluctuations on currency prices. Even if experienced traders use tools and charting software to detect trends and patterns, prices can still move unexpectedly and money can be lost quickly.
Traders can manage your risk exposure with the help of stop loss orders and limit orders. These are commonly used to stop potential losses. For instance, if the market moves against a trader's position, they can use a stop loss order to automatically close the position at a pre-determined price. A limit order places a restriction on the minimum price to be received or the maximum price to be paid.
There are more ways to limit risks but none can eliminate them entirely.
What Strategies can be used on the Forex market?
Buy and sell decisions on the market are never left purely to guesswork! Traders use technical analysis to help them make decisions. Not surprisingly, the most dramatic changes occur to currency movements when an unexpected world event happens (such as a natural disaster like an earthquake, or a political coup). In most cases, the market is affected by anticipation and speculation on events and then their outcome. For example, the market might be expecting Gross Domestic Product (GDP) data to be released about the fourth quarter in Australia. Analysts and expert might confidently be expecting it to be at least 5% growth.
Consequently the Australian dollar goes up in value as investors buy the currency – it has become more valuable. The official announcement is made, and the actual figure turns out to be 4% - this surprises the market and the Aussie falls sharply in reaction.
Traders never leave decisions to chance – they will use careful analysis and trend recognition to help them.
How much money do People invest in Forex trading?
There is a lot of money to be made in forex trading, though it is never guaranteed that a trader will make returns. As with any type of investment, it is up to you to decide how much risk you are willing to expose your money to.
Most online forex companies will allow their clients to carry out margin trades at up to 100:1 leverage. That means the investor can execute trades of $100,000 with an initial margin requirement of just $1,000.
While this allows for great profit potential, it also puts you at the same amount of loss potential – such is the double-edged sword of leverage.
Newcomers to the forex market can choose a smaller margin trade – such as 20:1 – until they are more comfortable.
How do you make money on the Forex market?
The easiest way to start trading on the Forex market is by signing up with an online platform (or brokerage firm). They offer a range of attractive account types – such as the Mini account which is designed for newcomers as it carries a low minimum – to Standard trading accounts.
Brokers rarely charge commission. Instead, they offer you a margin on which they will charge you interest. Margins can range from as high as 200:1 or more to smaller ones of 20:1. Points, or 'pips' are how profits are measured on the forex market.
As the forex market is open such long hours, it would be fair to say that you could be trading in large volumes. If your positions are successful, you could earn large amounts of capital (depending on how much you invested to begin with).
How can I start trading Forex?
To get going, you will need a broker (or platform). These are widely available on the internet – compare offers to get a good one. Use Which Way To Pay Australia to look at the best brokers in the business. Check what they offer – are there any additional features like practise accounts? – and look at what margins and spreads they offer.
If you are completely new to the forex market, it is highly recommended that you carry out some research and background work into the topic. Learn about technical and fundamental analysis and how to detect trends and patterns.
Seek independent financial advice and decide how much money you can afford to invest.
Remember to abide by the old investment guideline: "Never invest money which you can't afford to lose".
In other words, make sure that the money you invest in the forex market is money which is aside from your day-to-day cash flow.
Please note: We have outlined Forex trading risks on a separate page. Risk exposure is a factor in all types of investment trade.
Please Note: www.whichwaytopay.com.au is not authorised to give advice under the ASIC (Australian Securities & Investments Commission).
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