~THE FOREX LAB~
What is FOREX?
If you've ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet (if you're a dude) or purse (if you're a lady) or man purse (if you're a metrosexual) into the currency of the country you are visiting.
You go up to the counter and notice a screen displaying different exchange rates for different currencies. You find "Japanese yen" and think to yourself, "WOW! My one dollar is worth 100 yen?! And I have ten dollars! I'm going to be rich!!!" (This excitement is quickly killed when you stop by a shop in the airport afterwards to buy a can of soda and, all of a sudden, half your money is gone.)
When you do this, you've essentially participated in the forex market! You've exchanged one currency for another. Or in forex trading terms, assuming you're an American visiting Japan, you've sold dollars and bought yen.
Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed. It's these changes in the exchanges rates that allow you to make money in the foreign exchange market.
The foreign exchange market, which is usually known as "forex" or "FX," is the largest financial market in the world. Compared to the measly $74 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely ginormous with its $4 TRILLION a day trade volume. Forex rocks our socks!
Why bother trading FOREX?
There are many benefits and advantages of trading forex. Here are just a few reasons why so many people are choosing this market:
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the "bid-ask spread".
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we'll explain later why a $25 account is a bad idea).
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage and all will be explained later.
A 24-hour market
There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
No one can corner the market
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
Where to get started?
Jumping into Forex can be a bit overwhelming at first. It seems everyone is trying to market the "Holy Trading Grail" that is guaranteed to lock in profits, beach houses in the caribbean, and a few Lambo's in your driveway. The truth- don't get your hopes up. Like anything, learning Forex takes time. Becoming a profitable trader takes more time. Making enough money to quit your day job takes more time. Don't jump into this market expecting to become rich in a few years. Set your expectations at a reasonable level, and work up from there.
Step 1- Technical Analysis
Technical analysis is simply the analysis of past price changes in the hope of forecasting future price changes. These past price changes are forecasted onto charts. These charts are then analyzed by traders, each in their own style. There is NO right way of charting. If there was a surefire way to do it, then quite simply, everyone WOULD be doing it. You must develop a technique that works for you. It takes time. It takes patience. But in the end, it can pay off, very well. Below are several educational links that I have found to be most helpful in learning how to use technical analysis. It can be overwhelming at first, so take a few deep breaths. Get ready to put in a lot of effort and study hard. You are on the path to learning a new language. Remember that you must develop a style that works for you. Get creative, KEEP IT SIMPLE, and remember that if it sounds too good to be true, it probably is.
Step 2- Demo Accounts
I recommend that EVERYONE start trading with a demo account. A demo account allows you to learn the market without risking your own capital. Forex is brutal. You do not want to be getting margin calls your first week of trading because you thought you were smarter than the system. You are not. A demo account will give you virtual money in which you can trade with and develop a sound strategy for becoming a profitable trader. I recommend trading with a demo account for AT LEAST a month, before throwing your own money in. Study your successes and failures. Learn from your mistakes! Below are the brokers I recommend for both demo and cash accounts.
Step 3- Cash Accounts
So, you've learned how to use a chart, you've developed a profitable trading strategy with virtual money, and now you think your the next Gordon Gekko. Whoops. Not yet pal. AFTER you have done both of these things, it is time to put some real cash on the table. You will soon find out that trading with your own money tends to be slightly more nerve-wrecking than throwing $50,000 worth of virtual money into XAG. You will find yourself becoming much more picky in your entries. At least I hope so. This is why a demo account is so important. You NEED to have confidence in a technique you have developed. Without this confidence, you will be second guessing your decisions, wearing extra strength deodorant during your trading sessions, and before you know it your account balance will read a big fat ZERO. You cannot let emotions interfere with your technique. Greed, anger, fear, despair, hope, all of these will leave you bankrupt before you can say "Son of a Bi***". You need to become a machine and conquer your emotional impulses. This is what separates the successful traders from the failures. Do not start out with a six-figure account balance. I would not invest more than 5k into your first forex account. Take it SLOW. Small gains add up into large lump sums over time. If in a year you have a finely tuned system that has been consistently profitable, you can invest more of your capital. But start out slow with an amount that will not affect your life if you lose it all (which you probably will end up doing). Good luck!
The Most Liquid Currency Pairs
|USD/CAD ||EUR/JPY |
|EUR/USD ||EUR/CHF |
|USD/CHF ||EUR/GBP |
|GBP/USD ||AUD/CAD |
|NZD/USD ||GBP/CHF |
|AUD/USD ||GBP/JPY |
|USD/JPY ||CHF/JPY |
|EUR/CAD ||AUD/JPY |
|EUR/AUD ||AUD/NZD |
Notice how they are essentially an inverse of one another.
Yes trading can be tough.
"To be a successful trader you need to trade without fear. When you use fear as a resource to limit yourself, you will create the very conditions you are trying to avoid. Or to say this another way, you will experience your fears." Mark Douglass
The Psychology of Trading