A couple weeks ago I wrote a piece that compared the Spot Forex market to the Forex Futures. It recently dawned on me that the piece was really written to an audience that already has some knowledge of Forex. So let’s discuss the basics of this very opportunistic market.
The foreign currency (Forex) market is where global exchange rates are derived for everyone including market speculators and end users of currency. People and companies buy and sell currency much like you would buy and sell anything else.
Strong economies have strong currencies. When we trade the Forex markets, we are trading economies. Therefore, supply and demand for currency depends on the current and expected perceived health of a country’s economy.
A Brief History
Foreign currency (Forex) trading traces its history centuries back before the Babylonians. While they were the ones credited with the first use of paper notes and receipts, forms of currency had existed for quite some time already.
In the beginning, the value of goods and services was expressed in terms of other goods and services, also called “the barter system.” Limitations of this system were the catalyst for establishing more generally accepted mediums of exchange.
In the early days, primitive economies used items such as teeth, feathers, and stones as means of payment. In time, a more structured value system using gold and silver was created. After this came government paper money like we use today.
Over the past few decades, foreign exchange trading (Forex) has developed into the world’s largest global market. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values based on pure supply and demand for currency.
Leverage — Low capital requirements. Forex traders can start with much smaller amounts of money than you need for day trading equities.
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Time — Forex traders can trade when they have time. The Forex market is open and moving 24 hours a day, 5 1/2 days a week. Trading occurs in all time zones in the world and can be a part-time or full-time occupation.
Opportunity — The Forex markets are fantastic trending markets. They are also made up of markets that are not moving in the same direction. This provides rare non–correlated opportunity. Also, traders can profit in up and down trends by buying long or selling short. There are no short-selling rules.
How Does a Trade Work?
First off, a “PIP” means Percentage In Points. For example, a move in the Euro vs. Dollar from .9050 to .9051 = 1 PIP. At $10 a PIP, let’s calculate a trade setup much like we do in the Extended Learning Track (XLT) Forex class.
Trading a 1 lot, if we have a protective stop loss that is 10 PIP’s away from entry and a target for profit that is 30 PIP’s away from entry, we would be risking $100 to make $300, 10 PIP’s to make 30, or a 1-to-3 reward to risk ratio.
The key to getting involved in Forex trading is to first get educated and keep things simple. Next, trade a demo account until your numbers suggest you should trade real money. Once that is accomplished, you can trade mini Spot Forex at $1 a PIP.
Once your numbers suggest you are doing well, which means you are consistently making at least two or three times what you are losing on each trade along with a decent win/loss ratio, then go to the $10. a PIP market and trade your successful plan.
Never put your hard-earned money at risk until you are quite certain you have a plan that leads to consistent profits. You will only know this after your education leads to a trading plan that leads to consistent demo and mini Spot Forex trading. From my experience in the trading and trading education world, those who don’t think this way typically lose their accounts to those who do.
Sam Seiden is an options instructor with the Online Trading Academy. To learn more about him, read his bio here
This article originally appeared on The Options Insider Web site.
