Friday, August 5, 2011

E CURRENCY TRADING


So you heard about E Currency Trading or heard about Forex or FX and probably you got overwhelmed with all the information available on the Internet. Probably you read so many conflicting articles that contradicts one another. Even worse you could have read some articles written by a marketer and not a real trader selling you some kind of products promising $$$ in return.
Irrespective of what you have read, in this article I will explain to you what you need to know to start DEMO Trading with no fluff and sales pitches. Hopefully after reading this lengthy article all your conflicting information and doubts are cleared out, and definitely you will have solid foundation to start learning the exciting stuff in Forex. So let’s start!

What is Forex?
Forex, Foreign Exchange, FX, Currency Trading they all refer to the same thing – exchange of money from one currency to another. Believe it or not, the probability is that you had already traded currency in your life, that time for pleasure, but now we will learn how to do it for business.
If you live in the UK, the country currency is the Sterling (£). If you go for a holiday in most European countries, you will need Euros (€). So you will go to your bank, and exchange your Sterling money into Euros. When you return from your holiday, you may exchange back the remaining Euros to Sterling. Similarly if you go to any country using US Dollars ($) you will need to do the same.
Now, you may do the same thing but for business – to earn money. And this is Forex. You buy / sell currencies simultaneously. Forex is the largest financial network in the world with over 2 Trillion Dollars turnover transactions a day! You may also trade a variety of currency pairs.
OK, so I buy / sell currencies, do I need to go to the bank? How can I make money? I will answer these questions shortly.

What time can I trade?
Forex is traded 24 hours round the clock. The four major financial centres in the world are Sydney, Tokyo, London and New York.
Trading Sessions based on GMT (Greenwich Mean Time):
Region City Open (GMT) Close (GMT)
Europe London 8.00pm 5.00pm
America New York 1.00pm 4.00pm
Pacific Sydney 10.00pm 7.00am
Asia Tokyo 00.00am 9.00am
Trading Sessions based on EST (Eastern Standard Time):
Region City Open (GMT) Close (GMT)
Europe London 3.00am 12.00pm
America New York 8.00am 5.00pm
Pacific Sydney 5.00pm 2.00am
Asia Tokyo 7.00pm 4.00am

Even though the London market closes at 5.00pm it doesn’t mean that you can’t trade the Sterling. Similarly even after the New York market closes, you can still trade the dollar. This is why the Forex market is 24 hours and you can trade anytime, anywhere.
I believe that if you live in Europe, you are a bit of an advantage due to the time zone. London is a major market and you can capture large moves, day in day out. There are trading systems based specifically to trade the London Market. I will be sharing my trading system with you later on for FREE. I use this system everyday with great success.
Anyway, I have friends that live in America that wake up at 3.00am (their time) to trade the London Session!

So Who Trader Forex
Forex is traded by large banks, central banks, currency speculators, corporations, governments and speculative funds. There are also people like you trading from home. Of course there are also mini banks, medium sized companies and professional traders where trading is their daily job.
So of course you are not trading alone (well you can’t trade alone ). Just be warned that large banks and other financial institutions have an army of professional well trained traders whom they trade millions and millions of dollars daily.

Most Popular Currencies
You may trade any currency that you want however there must be enough liquidity in the currency pair that you are trading. Every currency that you are trading always come in pairs, because you are buying one currency and selling the other currency. Remember the holiday example?
For example: EUR/USD currency pair means Euro / US Dollar. USD/JPY means US Dollar / Japanese Yen
The six most important currency pairs are the following:
  • EUR/USD (Euro / US Dollar)
  • GBP/USD (Sterling / US Dollar)
  • USD/JPY (US Dollar / Japanese Yen)
  • USD/CHF (US Dollar / Swiss Frank)
  • USD/CAD (US Dollar / Canadian Dollar)
  • AUD/USD (Australian Dollar / US Dollar)
These are called the Major Currencies and have the most liquidity. As a beginner you should always start with EUR/USD.
The other pairs are called the Exotics like GBP / JPY, AUD / NZD – (Australian Dollar / New Zealand Dollar). Of course there are many other exotic currencies apart from these two.

What do you need to trade Forex?
With the above basic understanding, what do you need to start trading? Here is the list in order:
  • A computer / Laptop / Mobile – mobile only if you are already experienced trader.
  • Reliable Fast Internet Connection
  • Forex Broker Account
  • Trading and Charting Platform Software – provided by the broker for FREE.
  • At least ONE successful trading system.
  • Solid Money Management Technique
  • Discipline – since you need to control your fear and greed.
EH? Discipline? What are you saying? This is big topic and I will be writing a lot about it. My personal problem when I started trading was fear – I was afraid to enter the trade because I was afraid to lose money. It took me a while (couple of months) to get over it!
Now be careful, since controlling your emotions (discipline) is mostly used as a sales pitch by Marketers especially those that sells robots. They say – “Robots take away your emotions, since they will always enter the trade at the right price, and exit the trade at the right price, since they follow exactly the trading system rules.” That is a valid argument, but there are many other factors to be considered prior entering a trade that robots can’t do. But they don’t say this to you. This is another topic that I need to write a lot about, and once you start learning for free in this blog about how to analyse the charts, you will realise that robots in no way can make you money. Robots that make money are not for sale. Full stop.
Typically their blogs will be full of great comments – like “I recovered the cost of the course in 2 days”, “I made $500 in my first trade”.  You will also be flooded with emails that the system will not be anymore on sale, so buy the system now – you know this creates an urgency in you and you end up buying the system, since you think that you can’t lose the opportunity of your life – the chance to change your life. You know what I mean.  And how many times you got disappointed? I think 99% of the time.  In the Forex market, it is 99% of the time, and if you are a beginner it is 100% of the time.   And guess what?  The system will be resold again (probably under a different name) few months down the line.  These kind of people are internet marketers and not traders and 3 names just came in to my mind right now.  They sell useless systems every 2 months or so, and people like chickens buys these useless systems.

Brokers
As I said, you will not go to your bank to trade Forex. You will trade from your home or office or even while on the go with your mobile! So you need what is called a broker. You will need to deposit funds to your broker, download their trading platform and you may start trading. You will be presented with a number of currency pairs, charts and trading indicators and you can start buying / selling with a click of a mouse.
That’s it.
When you open your currency pair chart, you will see the Ask / Bid prices of each and every currency pair that can be traded. You can also open the currency chart to analyse the currency price action using technical analysis – a FREE course later on. Once you think that now it is the right time to buy / sell, you will place your order and the broker will then process the order and eventually execute your trade in the market.
That’s basically the procedure, but if you just follow what I said and you are a beginner, you will loose all your money in a blink of an eye.
First, you need to find a regulated, reliable honest broker that works with you and not against you. You will need to learn how to use the trading platform, and most importantly you need to learn how to trade by DEMO trading for a couple of months. During these months you will be applying technical analysis to analyse the charts and the behaviour of the currency pair. Using technical analysis, you will be entering high probability trades that in the long run will make you money. During this period you will also be building confidence in the trading system that you are applying, and also getting used to the currency pair personality. Yeah every currency pair has its own personality and behaviour but you will quickly get used to it by simply demo trading it. When you are confident with your skills, the trading systems that you are using and you are confidently making money in the demo account, only then you may start trading for real money. At this point, you must be careful to be always disciplined. But if you did money demo trading, you will make money trading live now. And trust me you can make truck loads of money but you need to learn how to the proper way. And I sorry for repeating – DO NOT USE ROBOTS!
I was carried away a bit with that but I wanted to give you a high level overview for the path of success.
Back to the brokers, there is a lot to say on brokers and how to select your broker, and I will be writing another article on how to choose one. Remember, your broker must be your friend. On the other hand, don’t blame your broker if you lose money like many people do! There are thousand ways of how to lose your money other than your broker!

Trading Platform
The most popular trading platform that you will be using as a beginner is MetaTrader. It is the easiest to use although not the best. But it suits is purpose for beginners / intermediate traders. You will find a lot of video tutorials on You Tube and I will be doing some as well in the future.
What is nice about MT4 is that you can program your own manual processes and imbed them into your trading ploatform. This is how robots are created. From my side I have a number of indicators that help me on daily basis in my trading that I will be sharing with you shortly.
eToro is also a very trading platform, although in reality eToro is a broker and an excellent one too.
DealBook is another trading platform and is one of the top trading platforms used by some brokers.

How shall we trade?
The mechanics of making profit or losses in Forex is very simple. You either buy the currency or sell the currency. If you think that the currency will go up, so buy it now and sell it later at a higher price. Similarly, if you think that the currency will go down, sell the currency now and buy it at a lower price. Simple no? Buy low sell high, or sell high buy low. If you think it is that’s simple than you are completely wrong.
Once I was discussing with a friend whether the price of a particular currency will keep on going up or will retrace back. He jokingly replied : it’s 50% 50%. Well if you think about it this is very true. You will never know where the price will be going. You can only make an educated guess. So we must analyse chart patterns (using technical analysis) and take decision whether to buy, sell or just stay away from this the currency pair for now.
When we enter a trade being buy or sell, we must only do so when the odds are in favour of us. That is we know that we are entering a trade with a high probability of success, let’s say 30% 70%. What this means is that we can predict the price movement 70% of the time. Only this way, in the long term we will be profitable.
So how can we predict price movement? We use technical analysis studies with proven indicators that will help us take decisions – whether to buy, sell or stay away.
Technical analysis is simply price action, chart analysis study only. You will need to learn how to draw correct trend lines, how to pin point strong support / resistance levels and more and take action based on the technicals on your chart.
Other traders use news releases released by the big dogs (large banks, government statistics etc.) and they trade according to these new releases. So they base their decision whether to buy or sell simply by trading the news. This is called Fundamental Trading. Here you can find a forex calendar when such releases are to be scheduled.
So what shall we use to trade? Technical or Fundamentals? I use both! Yeah, I simply use technical trading to trade, and the Forex calendar that fundamental traders use to just stay away from trading. During news releases, prices go crazy, some brokers also freeze their trading session, so I just stay away. Further to this, I don’t understand a word of what they are saying so for me is useless. See a whole article on Technical and Fundamental here. However don’t take me wrong, Fundamental trading is very profitable too and the whole books on it and proven trading techniques, but it is just not for me.

Trading Systems
So till now we know that we need to use technical analysis to enter a high probability trade, and stay away from your charts when major news are going to be released like the FOMC, Payroll etc. Having said that we need a handful of proved trading system that guarantee a long term profit if traded successfully.
I will be giving away proved trading system that guarantee to work long term if you abide to the trading rules. Discipline! You will find many around for free if you Google it, but be aware that many trading systems are experimental or do not work at all. And stay away from expensive courses, I will cover everything needed here for you to be successful. I have been scammed myself, so I know what there is outside here.

You need to find your Personality
By demo trading for a couple of months, you will need to discover what type of trader are you. What? Let me explain. You can trade in 3 ways.
Scalper. Is a kind of trading strategy with the intention to open a trade for a short period of time – sometimes less than 1 minute for a quick profit.
Intra Day Trader. Is a kind of trading strategy where you trade 5 minute, 15 minute, 30 minute, 1 hour, 4 hour charts with the intention to close the trade at some point during the day. You may take more than one trade of course. You need of course be staring at the charts most of the time.
Day Trader. This is a trading strategy where a trade can be left open for weeks and even months. You will normally trade at the end of the trading session and adjust stop losses, profit targets etc. at that time.
Although technical analysis is used in all cases, you must integrate trading in your daily life style. If you are a busy person, scalping or Day trading can be suitable for you. But believe me these two are completely different strategies and require different skills. In scalping you need to think and react fast. In day trading you may take hours to place a trade as long as you place it prior the next day open session. This also requires huge stop losses and many people can’t live with that.
By demo trading, you will need to explore all three kind of strategies and find which one fits your trading style and life style. All three can be rewarding! Of course you can use a mix of both or why not, all the three of them!
So by now you may start realising that trading is not just open and account and start making money! Reality is very from that!

Risks Involved
As like all kind of investments, forex is no exception. If you open an account with $1000, you may wipe your account in less than a day if you are not careful of what you are doing. Forex is a wild animal and it moves fast too!
The problem is that in forex there is high leverage, which in simple words it means that every time you place a trade, your broker is lending you money to trade with. This is why you can make money fast or lose money fast. Just to put some numbers into perspective, if you place an order of 1 lot for the USD/CAD currency pair, you are effectively buying 100,000 Euros! So you are playing with huge money there. A slightest change in price which is called a pip, means a $10 profit. Forex is so fast and so dynamic that the currency pair can move 10 pips in less than 1 minute, meaning you did $100 profit, or -$100 loss if it moved against you.
Trades are expressed in lots. You can trade with lots, mini lots, micro lots and now even nano lots. So lots are equivalent as follows.
1 Lot = trading with $100,000, 1 pip move is equivalent to $10
1 Mini Lot (0.1 Lots) = trading with $10,000, 1 pip move is equivalent to $1
1 Micro Lot (0.01 Lots) = trading with $100, 1 pip move is equivalent to $0.1
1 Nano Lot (0.001 Lots) = trading with $10, 1 pip move is equivalent to $0.01
Just note that the broker is lending you money, and his money is never at risk. The broker will close automatically your loosing trade prior even his money is at risk. This is called margin call.

Money Management
Following of what we have just said, you need a solid money management plan, so when you lose a trade, you will lose little capital so you can remain in the game, you can keep trading! You will never win all the time, you will always have loosing trades. So you need to minimise your loses and keep profits run! This is easier said than done, but that is the whole philosophy and is the right approach to trade and be profitable.
I see many trading systems and robots that risk let’s say $70 to earn $10. This is called the risk to reward ratio and in this case it is written as 7:1. Do you think that this makes sense, 7: 1 ratio? So this system must have a strike rate of over 70% for me to be in profit. It is more than 70% but let’s keep numbers simple.
So let’s assume that we had 8 successful trades, so we are $80 in profit. Then we hit a bad trade, lost -$70. So we are still $10 in profit – cool. What if we hit another bad trade now? Let’s say we had another good trade, so +$10, and then we hit a bad trade. So ($10 + $10) – $70, so you are now -$50. Such trading systems always fail even if they have high strike rate. Remember that every trade is independent from the others, so what happened in the previous trade may happen again in this trade irrespective of probabilities.
So you need to go for at least 1:1 risk to reward ratio with a strike rate of over 50%. Best trading systems have 1:2, 1:3, 1:4 or more risk to reward ratio. It does not mean that in every trade you will make twice as much the risk because you need to take from the table what the market gives you, but your trading system is designed with such ratio in mind. There are a lot of trading systems with this a good risk to reward ratio, so don’t worry!
So now, when you see a robot for sale, ask the risk to reward ratio and probably they will tell you (if they understand you) 5:1. Recently there was for sale a number of trading systems and the top one (supposedly meant to be the best one) was going for 10 pip profit for 50 or more risk. Complete nonsense.

So how much profit can I make?
You have been waiting a bit for this answer. By now you should realised the risk involved, how pips are measured in the forex market and you need to have a trading system with a least 1:1 risk to reward ratio.
So how much money you can make? You can lose a lot fast – this is a fact. Realistically you need to aim for 5% a month of your trading account. You will have days where you will lose money. You will have days where you make money. What is most important is to stick to your trading strategies and trade consistently. With a solid trading system and a good money management you will consistently start making over 5% per month – if the market permits!

Final Words
Forget about rich quick schemes with Forex. Those are all lies. But you can make it, but there is a bit of a learning curve to go through, but once you learnt, that means that you have now become independent for life since then you will be able to rack in money from the market consistently.
The market will become your ATM machine. But like anything else, you need to work hard to get results and forex is no exception. If you think that with forex you can get rich tomorrow, just forget it and go and do something else.
So are you prepared to learn? Follow me to the Basic Forex Course offered for free here in this website – and start learning today!