Currency Trading
As I am sure you know by now, I am a trader
that works from
home
trading currency full time. I have traded
all the other instruments I discuss on this web site ( and some
I haven't) so I speak from experience. I practise what I preach
and am unlike virtually all the other people who teach or
advise, in that I actually trade full time. The reason I enjoy
trading currency is simply because I find it suits my
personality, it does not involve an enormous amount of time in
research of the markets, and is one which it is very easy to go
both long and short. The markets are traded 24 hours a day, so
trading can be fitted around my lifestyle. The only time
the markets are closed is over the weekend ( time to catch up
with my shopping girls!) Since the making bread site has been
published I have been asked so many questions on currency
trading, that I have decided to develop a separate site which will
provide a free resource for all of you wanting to make a start
as a currency trader. For those of you that read my currency
trading blog, the new site will include suggestions on trades,
how to get started with mini and regular trading accounts,
trading styles and methods, and live charting.
Currency Trading : The Basics
One of the questions you might have when
you start looking at this market is 'what am I actually buying
or selling'?- the short answer to this question is nothing! The
retail FX ( FX =Forex= foreign exchange=currency ) market is a
purely speculative one and no physical exchange of currencies
ever takes place. All trades exist simply as computer entries
and are netted out depending on market prices. The reason the
market exists it to allow large organisations to trade large
amounts of currency easily. This constitutes approximately 20% of
transactions. The remainder is speculators simply trading on
rate movements! The leverage that is offered in the
currency markets is extremely high for the simple reason that if
you traded with real money in Forex, most traders would not have
enough cash to allow sensible trades to be made.
The smallest movement is a pip and on an amount of 1000 US dollars, a 1 pip movement would yield 10cents profit ( or loss ). Now bear in mind that a 100 pip movement in a day is a reasonable size move, so you could stand to make 10$ on the day (this hardly sets the pulses racing!). In order to overcome this problem the currency brokers offer leverage to allow you to trade at meaningful levels. These vary from 1:50 up to a suicidal 1:400 which means that for 1000 USD in your account you could trade 400,000 USD in the market ( this is equivalent to $40 per pip movement so for a 100 pip movement in the wrong direction, you would have lost 4,000 USD) With only 1000 USD in your account you would have received a margin call or been closed out by the broker - not bad for one day's trading!! This is why currency trading is such high risk and ONLY for experienced traders.
One of the unique aspects of the currency market, is that we do not have volume showing to assist us in our chart reading, so your candlestick analysis has to be excellent, as you will need to interpret and analyse purely from the candles themselves.
Now - a quick lesson in currencies. All major currencies are
traded as a pair such as GBP/USD or EUR/GBP. Each currency pair
has its own chart and as you would expect there is a spread
between the two currencies. This varies from broker to broker,
as does the leverage. Another unique aspect of currency trading
is there is no commission! Suppose you think the GBP/USD
pair is moving up in price ( the dollar is weakening against the
pound), then you might decide to go long the GBP. In buying the
pound you are automatically selling the dollar. Every pair has a
pip quoted price - this is normally 2, 3 or four decimal places
depending on the currency. For each pip movement you would gain
or lose 1USD. If you wanted to sell( or short ) the GBP/USD you
would sell one contract instead. It really is this simple.
Naturally there are other aspects to consider such as
fundamental data, etc. but in essence that is really it.
Unfortunately, this simplicity belies the
risks and dangers involved
thanks to the leverage required to
make a meaningful trade size. Just as in online poker, it is
very easy to open an account and to start. The typical cycle
goes something like this - new trader rushes in full of
confidence and optimism with small amount of money - opens large
position with huge leverage and is wiped out very quickly.
Having learnt lesson one, they then return some time later, with
a larger fund and trade much smaller size lots ( contract sizes
) until they have built up experience. They may or may not
succeed. I did much the same myself, but was lucky. I rushed in
and opened six positions all of 10 contract size. I was
therefore trading 600,000 USD in a world market running to
trillions, with no previous experience and no plan. MAD. In a
few hours I was 2,500 dollars negative. I sat up all night and
watched the positions move ever lower through Asian trading.
Quite why I sat up all night I have no idea - I probably thought
I could influence the direction by the power of positive thought
!!!!!! - to cut a long story short I managed to close out at a
profit of a few hundred dollars the following day. I was lucky -
you will probably not be so fortunate. If and when you come to
this market, please learn from the above. The main reason
most people fail at currency trading is from under-funding.
Because you can start with a very small amount of money( and
trade large quantities) this is what most people do - they
quickly lose their money. The only reason I survived was because
I had over 10,000 dollars in my account.
IN MY OPINION, THE
MINIMUM YOU SHOULD START TRADING WITH IS 5,000 DOLLARS AND PREFERABLY
10,000 DOLLARS.
Currency Trading: Web Site
As I said earlier, I will have a dedicated web site up shortly just for currency trading. It will cover all the basics for you, including technical and fundamental trading, deciding what type of trading style suits your personality and lifestyle, hedging risk, correlation, carry trades, and some suggestions on the type of brokers to look for in the marketplace. It will also have live charts available free of charge so you can study how the markets move, but remember there is no volume in the currency charts, so our candlestick chart reading has to be excellent. I hope to have this available in the next few weeks so please bear with me - it will cover all aspects of currency trading - and more!!