Trading Academy

Trading Forex

Welcome to the forex trading section. Forex trading is not easy however provides significant potential for profit, as more and more people are discovering. In this section, I want to provide information to help you decide whether forex trading is for you and then to assist you with trading forex.

The foreign exchange market facilitates the conversion of one national currency into another and is the world’s largest financial market.

The most transactions in foreign exchange markets involve the United States Dollar (or USD), and is the currency by which most others are quoted. When a currency exchange is quoted, it must include the two currencies in the transaction.

In quoting, there are standard abbreviations which designate the currency, for example:

United States Dollar USD
Australian Dollar AUD
UK Pound Sterling GBP
Euro EUR
Japanese Yen JPY
Swiss Franc CHF

For example, AUD/USD 0.7000 – this means that you require 0.7 USD for every Australian dollar. Another way at looking at the quote is to replace the ‘slash’ (/) with ‘1 equals’. In the above example, 1 AUD equals 0.7 USD.

There are significant advantages of trading forex over other financial products. However, trading forex carries significant risk – you will need to investigate whether trading forex is for you.

Within the forex market, there are day traders who trade solely based on intraday technical signals, and disregard fundamental aspects completely, and there are those who take the larger picture into consideration when deciding their intraday trades.

This contrasts to swing traders who adopt a combined approach of longer-term analysis of technicals and fundamentals when trying to determine good entry opportunities. So, day trade or swing trade – what is the difference in trading forex?

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Interestingly, each currency pair has its own personality, and you may need to adapt your trading strategies to tailor to each of the different currency pairs.

Interestingly, not all countries have floated their currency which means in some cases, the exchange rate is set by the government. Sometimes, it may be difficult to conduct an exchange with these currencies (find a willing counterparty) in large amounts.

On 1 January 1999, the EUR was introduced and began trading in a cashless form as a single currency for 12 European countries. These are Austria, Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, The Netherlands, Portugal, Ireland and Spain.
On 1 January 2002, notes and coins were introduced for the Euro and on 1 July 2002, the Euro became the only currency for those countries.

The foreign exchange market is made up of three different parts. They are the professional market, the wholesale market and the retail market. The professional market is further broken down into three parts, namely spot, forward and options/derivatives.

The spot market is where two currencies are traded at a price agreed to now. The forward market allows dealers to buy one currency and sell another currency on a particular day and to do the opposite on another day in the future. This is known as an FX swap. The options/derivatives market allows dealers to profit by trading volatility.

The major participants in the foreign exchange market are banks, large corporations, brokers and central banks. Banks are usually market makers whereby they quote two way prices allowing others to either buy or sell at the bid/ask prices. Corporations will trade in the foreign exchange market because they will have foreign currency exposure due to importing and/or exporting activities.

Ultimately, just like the value of shares, the two things that affect the value of a currency are supply and demand. However, there are many fundamental influences on supply and demand for a particular currency.

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One of the most significant influences is known as interest rate differential. This occurs when a comparison is made between the interest rates in two countries, and often if there is a significant difference, the country with the higher interest rate will attract foreign investment. The foreign investment will have to buy local currency (eg. AUD), in order to invest in Australia, and this will therefore increase demand for the currency.

Another influence is the import and export of goods. When companies import goods, they need to sell their local currency and buy the foreign currency, therefore increasing the supply for the local currency. Conversely, when companies export goods, they will receive foreign currency in payment which they will convert into their local currency by buying their currency and therefore increasing demand for it.

Psychology of Investing: Five Caveats That Can Protect You from Losses

Beginners in forex trading might make the simple assumption that it is an objective science. With the complex analytical tools and sophisticated trading methods, it seems that forex trading is a matter of numbers, graphs, and statistics.

But more experienced traders are quick to say that forex trading has an intensely human, emotional side. No one can be successful at forex without an honest recognition of the psychological pressures trading can bring. Will a string of losses leave you unwilling to sustain risks? Or will a string of successes make you more confident in your trading experience and talent than you should be? Here are a few caveats that will protect you from losing big.

1. Risk is a natural part of investment, but only within reasonable limits.

It’s a basic principle you learned in investment 101: you can’t make a profit unless you take some risks. But both greed and desperation have a funny way of making people put more on the line than they ought. Always have an objective way of monitoring your risk exposure. Set limits for yourself and never go beyond them.

2. Occasionally an exception to your strategy is fine, but chasing profits is not.

Just because you establish a strategy doesn’t mean you have to stick with it artificially. The best methods are often a hybrid of several workable strategies. If you know how to profit with each method, you can switch between them and maximize your profits. However, too many people have a great group of trades and spend the rest of their time trying to duplicate them through some of the best forex brokers. If something goes well, learn from it. But keep on experimenting—most likely, that particular set of circumstances will never happen again.

3. Sometimes success comes in groups, but every trade stands on its own merits.

The simple description for this caveat is ‘the gambler’s fallacy‘. The thinking goes like this: if I flip a coin 50 times, I should expect a 50/50 distribution of heads and tails. So if I get 15 heads out of my first 20 flips, I should expect to get lots of tails soon. The answer is that every individual flip is still a 50/50 chance of either one. Or in another form, gamblers assume that they are having a “lucky day” and keep rolling. The same goes for trades. Don’t think that a string of bad trades has to be followed by some great success. Every individual trade is only as good as your research and skills—regardless of what the rest of your day has been like.

4. The forex market has big opportunities, but nothing unrealistic.

Forex inherently involves huge amounts of money. Some of this starts to play with your head after a little while. Just remember that what matters at the end of the day is whether you came out in the black. You can make money in this investment, but if you’re making enough to support yourself, you should be really happy. That relates to the last caveat.

5. Learning from other traders is good; comparing yourself to the best is always discouraging.

You may have a great golf swing. If you just enjoy what you’ve achieved you’ll be happy. But start comparing yourself to the pros and you suddenly feel like a beginner again. The forex world is full of advertisements for people that claim to make thousands in easy money every day. Comparing yourself to them will only make you unhappy. Be thankful for what successes you achieve, and focus on doing just a little better—not becoming the best overnight!

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The data is updated at 6:00 pm New York time. This corresponds to 8:00 a.m. Australian Eastern Standard Time and 10:00 a.m. Australian Daylight Saving Time.

The close is derived from prices prevailing at 5:00 p.m. New York time which, by convention, marks the end of the forex day. The following trading day’s open price is determined by the first trade that occurs after 5:00 p.m New York time.