Basics of Forex Trading
What is Forex?
Forex (Foreign Exchange) is the instantaneous exchange of the current of one country for that of another. This form of currency speculation is formulated around the variation among exchange rates internationally. The Forex market is currently the world's largest, with an estimated $3000 billion turnover every day.
The primary difference between the Forex market and other markets is that there's no established location where this trading takes place. Forex is based on an extensive market of dealers which are scattered across all the major international financial institutions. It's a 24-hour a day market, and it operates as a sole mechanism, which is communicated with technology and networks, over the phone or computer terminals. This allows transactions and trades to be conducted instantaneously across the globe. 10% of the Forex market is comprised of electronic brokers today.
The most important point in Forex trading is settling sale-purchase operations concerning foreign exchange contracts with the goal of earning profit based on the fluctuation of currency value and subsequently exchange rates over a given period of time. The contract trading of exchanges on Forex markets is formulated around the precepts of margin trading and are conducted through international Market-Makers, which sell and buy foreign currencies at a certain price determined by the market state of the given national currency. The nature of margin trading is as follows: the trader/investor lodges the his resources to a deposit by a broker, which allows him to handle the directed credit, the leverage, which is ascertained on the collateral, as much as ten to 200 times more than the initial dedicated resources. The returns cannot fall below the initial dedicated sum, so working with a broker prevents the possibility of losses.
Margin trading encompasses multiple stages: that of the purchase of a foreign currency at one price, and the subsequent sale of that same currency at another, or the same, price. The first part of this process is called 'opening a position', and the second is called 'closing a position'. When opening a position no actual foreign currency is delivered, and the investor commits to an insurance deposit which guarantees compensation for any potential future losses. Once a position is closed, the initial insurance deposit is returned, and any possible gains or losses are settled, which generally are equivalent to the initial insurance dedication. Furthermore, the deposit is often as much as 100 times less than the dedicated sum, which is allowed for the investor to commit to the trading position.
There are a few different divisions that can be made with foreign currency market operations:
Opening a speculative foreign currency position with the necessity of reversing the repurchase of the dedicated sum at the expense of the broker, and with the goal of profiting once the exchange rate is changed, is called an 'arbitrary conversion operation'. This type of trading must be conducted with a rounded amount of currency.
Opening a foreign currency position with the requirement of delivering physical sums, seeking to hedge the possible future losses which may arise from fluctuating exchange, currency, or interest rates, is called a 'hedging operation'.
Conducting transactions with market agents to trade agreed upon sums in one currency for agreed upon sums in another at a specific and negotiated rate at a specific time is called a 'conversion operation'.
Transacting foreign exchange market agents for appealing investments or rates and transacting assets over a given period of time at fixed interest are called 'deposit-credit operations'.
Financial risks are an assumed part of any financial or business activities, whether this be investment or production. This risk can come in many forms, from underselling, devaluation, over or underestimation, and are involved in anything from the purchase, maintenance, or selling of assets. The significance of this is that any company committing action, whatever it may be, faces possible losses when they do so, or the possibility of overestimating the profit due to various possibilities like market fluctuations or underproduction. Risk encompasses the possibility of losses, the possibility of a reduced or overestimated profit, and most people are more willing to assume smaller consistent gains and the minimization of risk than larger risks are larger possible gains. This is the reasons for the formulation of derivative financial tools, mechanisms such as futures, options, forwards, all of which fall under the umbrella of leveraging and reducing risk called 'hedging'.
Analyzing a given market situation falls into two methodologies, the fundamental method and the technical method. Fundamental analysis approaches from the political and economic position, while technical analysis follows graphic research and analysis, formulated by mathematical methodologies.
Fundamental analysis includes a wide variety of considerations and admissions, including various current political and economic climates around the world, which can play a role in impacting the exchange markets, as well as the level of impact that these events and climates can induce in the foreign exchange markets. Data to be analyzed and considered here includes the current stock exchanges, positions of large market makers, refinancing rates for the major financial institutions, governmental economic policy, and possible political and economic currents in a given country, along with projections and word of mouth information on a given market.
Technical analysis encompasses projections and forecasts of changes in price and exchange rate based on the changes and fluctuations in the past deduced by mathematical models. Given time periods and rates of exchange are analyzed, along with trading volume and various other detailed statistics. Many different mathematical and methodological tools are used to conduct this analysis, and they're all centered on the premise that by analyzing the progression of prices and volume over certain periods you can identify similarities to current situations and discern the general trend and possible projections of where the market may be going, as well as to more comprehensively determine the causal relations and factors determining the current economic climate.
Risk management is a process by which you identify the areas where there is potential risk, and select a strategy to minimize this, or to go choose another course completely. The target function is to reduce the area over which a company's value is dispersed.
- Identifying Risk: What current areas or activities could lead to potential risk? Though of course no profit is possible without expense, and thus ultimately without some form of risk.
- Assessment of the amount and profile of risk Depending on the value and assets of the company, what is the value of risk incurred by the action or transaction?
- Possible alternatives and methods of avoidance Possible alternatives to current action, or ways that risk can be averted?
- Is the risk worth it? What is the ratio or correlation between the amount of risk and the possible gains?
- Determining the sustainability of a certain amount of risk for a given company. Can this potential risk be sustained? If you're afraid of losses enough to conduct thorough analysis, then profits will generate on their own. What is the overall volume of an endeavor, or operation?
- Insurance costs and the cost of potentially avoiding risk in future income.
- Selecting a strategy or course of action
- Analyzing the results of previous actions and investments and consequences of not having taken a potential course.
One of the most important facets of trading is the psychological capability and stability of the trader. All guides and manuals of trading incorporate this.
Ultimately trading is a business, one that is potentially lucrative exciting, but still a business, and it's important to remember this and to always look at cost-benefit and value close analysis from trusted experts.
It doesn't take amazing intellect or mathematical genius to be successful or have a positive experience in trading. It's neither science nor religion, it is a business that involves conscious decisions, careful analysis and knowledge of consequences, consideration, and the maintenance of a set of intransigent principles. Trading ultimately is unlike any other kind of business on the globe, and it gives people better opportunities than any other business ever has.