Foreign exchange (also known as forex or FX) is a global, over-the-counter market (OTC) where buying and selling of world currencies are done by traders, investors, institutions, and banks. ‘Interbank marketing’ is where trading is conducted; currencies are traded 24 hours a day, five days a week through an online channel.
Forex is one of the largest trading markets, with a global daily turnover estimated to exceed the US $5 Trillion. All the stock markets combined together don’t even come close to this; it is the largest and most liquid market in the world. Up and down trading is one of the big differences with forex. Just like stocks, currency can be traded based on what you think its value is. Forex market deals with simultaneous purchasing and selling of two currencies, these are called ‘currency pairs’, and include a base currency and quote currency.
Trade and Key Terminology
Position: a term used to describe a trade in progress. There are two types; long and short position. A long position refers to a trader has bought currency expecting the value to increase. When a trader sells a currency and expected it to decrease and plans to buy it back at a lower price, it is called short position.
Spread: Spread is the difference between the BID and ASK price in the market quotes. BID price is applicable to a SELL order while ASK price is applicable to BUY order.
Leverage: This is the ability to control a large amount of money in the forex markets. It gives the traders the ability to make meaningful profits on the normally minuscule daily currency movements, and, at the same time, risk only minimal capital in a given position.
Margin: is a term given to the amount of money required in your account in order to open a trade.
Margin Call: When traders do not sufficient funds to sustain their current open positions in a market a warning message is sent.
Hedging: When a new position is opened opposing the direction of an already made position on the same instrument.
Rollovers/Swaps: Interest income and capital gains are also generated by forex trades. Every trade is not only concerned with two different currencies only, but also with two different interest rates. Rollover amount increases/decreases just as position size increases/decreases. 5pm EST (New York Time) is the time that rollovers usually take place.
Major Pairs: Most traded and this account for nearly 80% of trade volume on the forex market. Low volatility and high liquidity are what these currency pairs could have. They are known for stable, well-organized economies. Smaller spreads and less susceptibility to manipulation is also a very good advantage of this trade.
Crosses: They are also pairs but they do not include USD. Back in those days, crosses were usually converted into USD and then into the desired currency. They are offered directly these days.
Exotic pairs: These are currencies from smaller economies, paired with a major. Exotics are of much higher risk to trade compared to others (crosses and Majors) because they are less liquid, more volatile, and susceptible to manipulation. They also have wider spreads.
How Forex Trading Works?
It is all about buying and selling currencies in order to make a profit. You deal with two currencies at a time; one currency price is linked to the price of another currency in a trade. In a currency pair quotation, the base currency is the first currency appearing followed by the quote currency. The profit or loss you make is the difference in price between the currencies.
How to start Forex Trading (How to buy and sell currency)
First of all, have an active account you can trade but there is a requirement for you to make a deposit to cover the costs of your trades, this is called margin account. You also need a regulated broker of at least 5 years track record. All regulatory rules must be abided by the broker for you to be sure that the broker is legitimate.
Above all, learn forex trading, this is the first step in becoming a successful trader. Training materials are also available to both new and establish traders. These materials will assist you to become a better trader; workshops and seminars, online tutorials and webinars and EBooks and articles. Forex tools are available to all traders to make use of.
To enhance your trading experience, forex widgets will help you through. Common widgets include live rates feed, live commodities quotes; live indices quote and market update widgets.
Different Styles to Trade FOREX
Since everybody’s choices are not the same, we engage ourselves in different trading styles. The period at which you intend in a trade, the time at which you enter the trade and sometimes, the number of times in a trade separate different trading styles.
A trader can make use of any timeframe he/she wants. Timeframes are associated with different trading styles. Different strategies are used by traders to identify and capitalize on opportunities in the market. You can decide your entry and exit in a trade to be a few minutes, day, week or month. Traders should find what suit them and enjoy their trading experience.
|End of Day (EOD)||Day – Month|
|Macro||Day – Month|
|Position||Day – Month|
|Scalper||1 – 5 minutes|
|Swing||Hour – Week|
|Trend||Hour – Month|
Each of these trading styles is explained below:
1. END OF DAY (EOD) TRADING
This forex trading style is best for busy traders. Traders that do not spend much time in front of a computer analyzing trades. Full time working class people are mostly found in this type of trading style. They set pending orders on a daily or weekly basis to catch price moves. These people do not have to watch the screams when their orders trigger. End of day traders trading decisions after the close of the market. End of day and Day trading is entirely two different styles.
Day traders see through charts all day, they decide to open and close trade any time they want. These attributes do not go for End of Day traders. End of Day traders does not watch the market all day, it analyzes and strategizes during the trading day. Timeframe for End of Day trading is usually in days, weeks, or months.
We have different types of End of Day traders; some trade at the opening of a market while others trade at the close of a market. End of Day traders has learned to avoid short-term noise. End of Day trading is easier, accurate, affordable, and cost-efficient. As an End of Day trader, you still have your job.
2. MACRO TRADING
The strength or weakness of a market or currency to get involved in future price value is determined by fundamental information and/ or financial models. Forex and stocks have a different source of information. Macro traders go for broad trends. These traders need to understand the difference between a mix of economic data and a mix of markets. You do not need to be an economist before you become a macro trader. The enormous amount of macroeconomic discourse is more than sufficient in the media to do the thinking for these traders.
As a macro trader, you must understand that big player like Government, World Trade Organization and OPEC can influence the markets. Risk management and staying liquid (to avoid liquidity crisis) are what differentiate macro traders from fundamentalists.
3. A-DAY TRADING
As the name implies positions are entered and existed on the same day. No trade is done overnight unlike position and swing trading. You use profit target, stop loss or time exist to close any trade at the end of the trading session. Day traders depend on small gains to build profits because large price moves are uncommon. They make use of margin to take full advantage of their buying power. To be a day trader, you have to be with a computer all day monitoring positions.
Tips about Day Trading:
- Gather Information: Apart from the basic knowledge of trading procedures, you must know. You must know the latest happenings in the stock market. Knowledge about the economic outlook, the Fed’s interest rate plans, etc. cannot be overlooked. You know all these by scanning business news and visiting financial websites.
- Keep Enough Time Aside: As a day trader, you must know what you are up for. You hardly have time for any other thing because a day trader tracks the market and identify opportunities. These opportunities can come at any time during trading hours.
- Keep Enough Money Aside: Set aside a surplus amount of money you can run back to during trade. It may or may not happen so be prepared to lose the money.
- Little by Little: As a beginner, you must not do more than two stocks during a session. Tracking and finding opportunities with few stocks are easier.
- Run away from Penny Stocks: You must avoid penny stocks because it is mostly illiquid and the probability of making a jackpot is slim.
- Observe Trade: As a new trader, you are not advised to make moves for the first 15 to 20 minutes. Because the market is still very much volatile. The middle hour is usually less volatile; you can trade during this time.
- Limiting Orders Cut Losses: You have to decide whether to use market orders or limit orders. Market order executes at best available price at a time. It also has no price guarantee.
- You do not make Profit at all Time: You have to be realistic with yourself that there are times you make losses but make sure your wins are more than your losses. Many traders do not win more than 50% to 60% of their trades. Limit your risk on every trade to a specific percentage of the account.
4. SCALP TRADING
This is an extremely active type of day trading; it involves time to time buying and selling. Just like day traders, scalp traders aim at the smallest price moves. They are also profit builders from small gains. Low trading commissions have made scalpers to place plenty of trades on each trading session.
As a scalper, you must be precise and very attentive to the market because the average winning trade is small than average winning losing trade, you could lose all your profit in one or two trades.
Main premises of scalping are:
Exposure is the lessened limits risk: The probability of running into an adverse event is diminished by brief exposure to the market.
Larger moves are not as frequent have smaller moves: Scalper can still exploit many small moves in relatively quiet markets.
Moves that are small are easier to obtain: To warrant bigger price change, an unequal bigger supply and demand is needed.
Primary Style of Scalping:
A number of trades are made by pure scalper each day. They make use of one-minute charts since timeframe is small. This style of trading cannot do without Direct Access Trading (DAT) and Level 2 quotations.
Supplementary Style of Trading:
Long timeframe traders make use of scalping as a supplement. A choppy or locked in a range market welcomes scalping style. If you cannot see trends again in the long timeframe, trends can be seen and exploited in shorter timeframe; scalp trading.
We have three types of scalping;
The first type of scalping is called “market making” Here, a scalper takes advantage of spread by making bid and offer for a particular stock. This type only works on immobile stocks that trade big volumes with real price not changed.
The second type of scalping is based on buying shares of large numbers that are sold for a gain on a very small price movement. A position is entered by a scalp trader for many thousand shares and small movement is waited for. It is measured in cents.
On the third type, a high number of shares is entered on any setup or signal and the position is being closed as of when the first exit signal is generated, near the 1:1 risk/reward ration.
For you to turn small profits compound into large gains you must adhere to strict exit strategy. Key attributes that make this style popular are brief market exposure and frequency of small movements.
5. POSITION TRADING
This style has one of the longest timeframes; you can trade in months, years. Good technical and fundamental analysis is done by position traders to make decisions; they make use of price charts on a weekly and monthly basis to evaluate the markets. They also believe in identifying and profiting from long-term trends without paying attention to short-term price fluctuation.
Position trading is close to investment only that position traders may which to utilize both long and short trading strategies. Trading and course of action plot do not require much time as day trading or swing trading. Position trading is not demanding on a daily basis. You do not have to watch charts all the time. In a different type of markets, position trading can be more attractive.
Position traders profiting off of a long term trend by identifying a stock. You have to do a lot of research and take serious approaches to pick out stocks. Careful technical and fundamental analysis will help you in deciding your choices.
As opposite to day trading, position trade holds are longer and do not have brief fluctuation but both trading styles have something in common, which is reliance on pattern and research.
Approach to position to Trading includes:
Buy assets that have strong trending potentials, but yet to be trended.
The main component for a position trade is finding a trend. Assets trading is excluded within a range is extremely large and sans for many years.
6. SWING TRADING
Days or weeks are when positions are being held in this type of style. Because of timeframe, they capture short-term market moves. They make use of price action and technical analysis to know when to enter and exit a profitable trade.
The profit goal for swing trading is modestly at 10% or at 5% in a tougher market. These types of gains are not life-changing rewards sought after in the stock market. Swing traders do not focus on gains developing over weeks or months; they focus on the trade of average length of 5-10 days. The small wins in this trade add up to big overall returns.
You have to check your loss also; these smaller gains can only add the increase to your portfolio if you keep your losses at a minimum level. Use stop loss at 2% to 3% at maximum instead of the normal 7% to 8% stop loss. Larger gains can still be delivering in swing trading on individual trades.
7. HIGH-FREQUENCY TRADING
As the name implies it is a high-speed trading style. Complex algorithms are used by this type of traders to analyze multiple markets and execute orders based on market conditions. A lot of independent traders shy away from this style because of its fast execution speed to make the profit. Exchanges offer incentives to companies to add liquidity to the market. This has high-frequency trading popular.
Advantages of High-Frequency
Improving market liquidity and removing bid-ask spreads that would have been too small are the major benefits of High-frequency Trading. Bid-ask spreads increased when it was tested by adding fees on High-Frequency Trading. A very good example is that of Canada. The Canadian bid-ask spreads increased by 9% when the government introduced fees on High-Frequency Trading.
Disadvantages of High-Frequency Trading
With High-Frequency Trading, human decisions and interaction have been replaced with mathematical models and algorithms. Because of its fast timeframe, decisions are being made in milliseconds. You could make big market moves without reasoning. Dow Jones Industrial Average (DJIA), 2010 (May, 6) declined 1000 points and dropped 10% in just 20 minutes. This was known to be their largest intraday point drop although it rises again.
Another thing is that “little guys” (institutional and retail investors do not make much profit as large companies). The liquidity High-Frequency trading provides come and go too soon (within seconds), traders are unable to trade this liquidity.
Important Points of High-Frequency Trading:
It is well known as complex algorithmic trading that executes large numbers of orders within seconds.
Liquidity is being added to the market and small bid-ask spreads eliminated from the market.
People complain about it momentary liquidity and the upper hand institutional players’ gain during the trade. This made them trade in large blocks through the help of algorithms.
Which Style are You?
Different trading styles have been explained here, each of them varies from one another. As a trader, you must consider some factors when choosing your style. Factors like account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance; will help you decide your style.
Studies have shown that forex trading time duration is not equivalent to the amount of time you have to devote to the markets. For instance, traders with trading styles of small timeframe spend more time in the market every minute of every trading session to actively manage the trade.
Forex is what you can do anywhere and anytime with your own chosen trading style although no trader fit neatly into any one category. They primarily choose a style and mixed with other styles.
You need time and experience to point out a particular style that works best for you. Never forget you need high-risk tolerance coupled with your knowledge about forex to make huge profits.
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