18 October 2008

Forex Trading Basics - Part II

How is money made trading currencies?
When buying and selling in the forex currency trading system market, you'll see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.

The goal when investing in currency is to be holding a currency that appreciates in value in relation to the other currencies. To use an overly simplistic example, if you bought 50 British Pounds for 100 US Dollars, held the Pounds for 1 week, and in that period the value of Pounds increased in relation to US Dollars, you could then convert those Pounds back into dollars for, say, $120.

Currencies are traded on a point or pip system. A pip is another word for a point in the currency trading arena. Traders are trying to capture points. Depending on the currency, each point is worth a different amount. For example; the British Pound is worth about $10 per point that is traded per lot. If you trade 1 lot and capture 40 points, you just made $400. If you trade 10 lots and capture 40 points, you just made $4,000.00, etc.

Probably you may be wondering - What do emotions have to do with It? Where money is involved so are emotions. Many people are quite knowledgeable about trading but can't handle the emotions. Your emotions will be your biggest obstacle to successful trading. Not the techniques. To be a successful trader you cannot trade emotionally. You must trade logically. Our egos drive us to be successful 100% of the time, but in reality no one is successful 100% of the time. Not even the professionals. Successful professional traders clearly understand the market is about logic, not emotions. They trade logically, not emotionally and they are the 10% who trade successfully all the time!

However, not all people make it trading Forex. 10 % make money, and 90% lose money! Why? The 90% who enter the market are driven by emotions such as greed and fear. They lack a sound equity management plan and know very little about the techniques of trading. The fact is they are lacking adequate and proper education for the task at hand.

But how come Professional Traders earn so much money? Simply put, most Professional Traders are part of the 10% earning money. The 10% earning money actually receive the 90% money that is lost . If the 90% are paying the 10%, you can easily figure out that the 10% are being paid quite handsomely.

What is the difference between Futures and FOREX?

Currencies are the money that represent the monetary system from different countries. For example; the Japanese Yen, Canadian dollar, Brazilian Real, Swiss Franc, etc. Futures trading of currencies is done in trading pits, where you are trading those currencies today, but for future prices. FOREX trading is trading actual currencies at today's exchange rate with banks. All trades are done through brokers or market makers.

Am I buying actual currencies when I trade?

No. With your margin account, you are buying the right to trade one "lot" of a currency. Each lot equals a different amount of currency, depending on the currency being traded verses the US dollar.

What is Day Trading?
Day Trading is when a trader buys and sells his lots or stocks that same day. He is in and out of the market that same day. He does not hold his position overnight or for a week, etc.

Can I become a successful Professional Trader?
Absolutely! Trading is a profession that most anyone can learn. However, it doesn't happen over night or in a few weeks. You must go through the same processes of education and mentoring that all professionals go through. Generally, we are becoming conditioned by numerous national ads into believing that trading is simple. If it is that easy why do we hear the horror stories about day traders? Why do 90% of people lose on the FOREX?

Is trading a form of gambling?

All forms of trading and investment can be construed as a form of gambling, although neither are the same as playing the lottery, roulette or betting. Traders seek price fluctuations and investors seek return on investment. Both require a calculated risk that is minimized by knowledge. You are always gambling when you don't know what you are uneducated, trading emotionally or with a " hot tip".

Calculated risks are taken in all investments. People risk huge sums of money and not every one succeeds. Even when there is a track record of success as in many franchises there is still no guarantee. Their investment becomes a calculated risk.
The FOREX market is no different. When you trade not knowing what you are doing, or off a tip, you are gambling. When you trade after you have been educated or mentored by a successful program, or by other successful traders, you are now taking a calculated risk.

Can I lose everything when trading the FOREX?

No. You can't lose everything you own. The under-educated will more than likely lose their margin account. The educated will more than likely capture the loser's margin account money. Thus it is important to know at this point, what online trading cannot and will not do for you.

How can I get started?

You need to be very careful and exercise due diligence. There are growing numbers of international firms offering various approaches to FOREX trading. Look before you leap. Do your homework and check references. Many companies prey on the greedy promising phenomenal returns that are the exception, not the rule! Find a company that doesn't promise the moon. If it sounds too good to be true, it usually is. Reputable firms have credentials.

Beware of "Black Box" systems. It is against FTC regulations for a firm to offer any guarantee of performance of any system. What one can guarantee and offer is that their trading methodology is sound, productive and profitable.

Trading decisions should not be made by computer only. A professional trader is a human being, with emotions, intuition and a brain to interpret what the computer tells him/her. A trader is not a computer. A professional trader has been educated and is disciplined to live by his or her trading methodology of good judgement trading.

What Is good judgement trading?

Good judgement trading is the exact opposite of a Black Box System. It's a complete understanding of the market and its constantly changing environment. It is a clear trading methodology utilizing high probabilities. When a trader is educated, he no longer takes a shot gun approach to the market. He takes a very focused "rifle and target" approach.

How much money can I make?

If you get involved with the right company offering the proper education and mentoring, you can expect to create a financial performance expectation plan. Your plan will depend on how much you start out with, how knowledgeable and how unemotional you are.

Never enter the market without first paper trading, which is trading pretend money. Once you achieve a track record of consistently completing successful trades and prove to yourself you can trade, then and only then, should you enter the market with your own money.

What does it mean have a ' long' or 'short' forex position?

In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every forex position requires an investor to go long in one currency and short the other.