VividForex

The economy is the most important fundamental indicator of Forex trading. However, economical analysis for Forex trading is very different than with other trading, like the stock market.  With stocks, you can simply look at the values of the company’s assets and the flow of funds.  With Forex trading, you must look at all the numerous factors which influence a local and global economy.  Here are the core economical factors which must be analyzed for Forex trading.

Retail Sales Reports

The retail sales reports of a country (or region) can give you insight about the resident’s spending powers.  These reports will tell you the total amount spent in retail stores throughout that country.  High sales are an indicator of a strong economy which will likely have a surging currency.

Interest Rate

When a country’s interest rates go up, it becomes more attractive to investors because they get a high rate of return.  This leads to a stronger currency because of the increased investment. However, raises in interest rate can also cause the currency to go down because it may reduce the purchase power of the country’s residents. Thus, interest rates must be weighed against the purchase power of the country.

GDP

Gross domestic product refers to the total dollar amount of all of the goods and services produced in a country during a specific period.  The GDP is the main indicator of how healthy a country is financially.  Usually, GDP is referred to in percentages of how much it has increased or decreased from the previous period (usually the year or quarter). A very simple way of calculating GDP is either totaling all of the nation’s income or all of the nation’s expenditures. A more advanced method of calculating GDP is:

GDD= (customer expenditures) + (business investment capital) + (governmental expense on all goods/services) + (gross export – gross import)

Unemployment Rate

A nation’s unemployment rate is highly indicative of its economical health.  A high unemployment rate is also likely to affect the retail sales reports as well.

Economical Analysis Does Not Exist in a Vacuum

While these economical aspects can help predict Forex trading, traders must always be aware of the larger picture.  The economy of a nation can quickly change based on other fundamental aspects, such as a natural disaster or changes to government policies.  But just looking at fundamental policies is also unwise because nations typically follow trends.  For example, a tsunami in a country could cause its economy to falter for some time but, over the long run, the technical analysis may be correct in that the nation’s currency will stabilize.

Forex trading is often hyped up because it is so easy to get started, even with a small investment amount.  All you really need to get started with Forex trading is a home computer and about $2000 (even less with some brokers).  However, just because you can start Forex trading so easily, it doesn’t mean you are ready!  Here are the basic steps you need to follow before you start Forex trading online.

Learn as Much as You Can

It is not enough to simply read a handful of Forex trading articles if you want to start trading and actually profit.  You will need to sign up for classes and seminars about Forex trading which are held by industry professionals. If you cannot find a local class, there are plenty which are offered online.  It is not a bad idea to start with a basic e-course to get yourself through the initial concepts.  However, you will need to move on to a more advanced course which allows you to interact with a live instructor and also has workbooks with assignments (like calculating various situations). These classes are very useful for developing a Forex trading strategy for success.

Set Up a Demo Account

Before you jump into Forex trading with real money, it is imperative that you first practice with a demo, or “paper” account.  Don’t just use the paper Forex account for a week or two either! You should be actively trading on the demo account for at least a couple months.  Make sure that you are always trading as though it were real money.  Keep in mind that demo accounts do not always reflect the reality of Forex trading because the demos use real-time slippage and spikes.  With real Forex trading, your trade may not happen in real time so you lose a few pips.

Find Your Forex Tools

Even if you devote all of your time to analyzing the fundamental and technical aspects of Forex trading, you alone will not be able to predict market trends.  That is why it is so important to have a wide array of Forex tools at your disposal.  Most of the top Forex brokers will give you access to these tools for free.  Spend some time looking at different brokers to see what they offer.  Expect to some tools which your broker may not offer.

Determine Your Risk

Don’t start Forex trading until you have carefully calculated the amount you are willing to risk on trades. For most traders, a safe risk is about 5% of the account amount.  Traders must also determine their limit orders and stop orders.

Choose a Forex Broker

There are a lot of different factors which go into choosing a Forex broker.  You will want to look at:

• What spread is offered?
• Is the Forex broker regulated?
• What free tools or services does the broker offer?
• What are the margin offers?
• What type of user support is available?
• What is the account minimum to start trading?

Spend Some Time in Forums

Most Forex brokers online will have forums where traders can connect with each other and share tips and strategies.  It is a good idea to spend some time in the forums, especially to get a feel for the mistakes which people have made.  You will learn that it is unwise to put too much faith in those Forex tip websites and also about how to manage your risk.

There are two main methods of predicting risk in Forex trading: fundamental and technical analysis.  Fundamental analysis factors in all of the political, social, and economical aspects which may alter the value of a currency.  This can include environmental catastrophes, changes to governmental policy, and social climate.  Technical analysis instead focuses on historical trends in the market with the idea that history often repeats itself.

In studies, it was found that fundamental analysis is more accurate in for predicting the long-term trends on the foreign exchange market whereas technical analysis was more accurate for short-term predictions of less than 90 days.  For predictions of between 90 days to a year, studies found that combining fundamental and technical analysis worked best.

While it is true that one method of analysis may be more appropriate in certain situations, a Forex trader would be completely remiss to overlook the fundamental or technical aspects of a currency trend.  Yet, these forms of analysis are considered to be mutually exclusive.  That is why it always comes down to the Forex trader to determine which aspects are going to be the most influential for that specific trade over its duration of time.

Here is an overview of the various fundamental and technical analysis considerations for predicting Forex trading.

Fundamental Analysis

The economy is the major force of fundamental analysis.  Of course, the economy itself is affected by numerous forces which must be analyzed.  On a basic level, the economy must be considered on a local level of the currency and the impact that the global economy takes on that local economy.

Political stability, or the lack of it, is a major factor in fundamental analysis of Forex trading.  Do keep in mind that political stability can change rapidly which is why it is wise to look at technical analysis while factoring in any political stability factors.  Fundamental analysis should also look at governmental policies, agency reports, interest rates, assets, and employment rates of a country.

Technical Analysis

Technical analysis of Forex trading usually is done with complex charts which show the market trends over a course of time. While these trends can usually be directly linked to fundamental aspects (such as a drought or a new government policy), the idea of technical analysis is that history will repeat itself. Rather than looking at the fundamental aspects which caused the changes in trends, the technical analysis will look at the larger picture to get an idea of the market’s direction.

There are numerous types of charts which are used in technical analysis of Forex trading, such as bar and candlestick charts. There are also many methods used for analyzing the charts, including the Fibonacci study, Pivot points, and Elliott Wave theory.  Forex traders can purchase software programs which use technical analysis to predict market trends.  But do keep in mind that no program is perfect.  It would be unwise to completely ignore the fundamentals, like a natural disaster occurring, when managing your Forex risk.

The foreign currency exchange market is in constant flux.  There are so many various factors which change the value of a currency – social aspects, economy, politics, environmental catastrophes, etc – that it is impossible to track them all.  However, you will have to have a strong general understanding of each of the powers in play if you want to be a successful Forex trader.

Before you begin with Forex trading, you must spend time analyzing the trends affecting currencies.  There are numerous books, online tutorials, video classes and seminars you can use to learn about Forex trends.  Even with months of analysis, you are still unlikely to be an expert.  For the many people who are eager to start Forex trading, this lack of proper knowledge can be a major pitfall – and the reason that 70% of traders will lose money while the other 30% gain large amounts.  Some of the risk management lessons in Forex trading can only occur through experience, so it is wise to use a quality Forex broker to cut back on the risk.

You will need a Forex broker in order to start Forex trading. There are a huge number of Forex brokers available on the internet – and there is a huge difference between them.  Some of the Forex brokers operate under no regulation whereas others follow strict regulatory guidelines which are designed to reduce risk.  For traders in the United States, the CFTF and NFA give information about specific Forex traders and their histories. With a quality Forex trader, you should get access to free advice, systems, or educational materials. Look for the Forex traders which offer real-time charts and pivots.

Aside from knowledge and assistance, Forex risk management also depends on keeping a sound risk profile.  As a trader, you should have set up a risk profile in advance where you decide the exact percent of the account amount you are willing to risk.  You must also determine an exact stop-loss order as well as a limit to exit order. For example, if you are dealing in the currency pair EUR/USD at the price of 1.0190, you could set your stop-loss order at 1.0150.

For traders, one of the major advantages of Forex trading is that it has such a high leverage, often going up to 1:200.  While this amount of leverage is attractive because it can greatly magnify your profits, never forget it can also magnify your losses too.  Take some time to do the math before you enter into any trade.  Calculate how much you would gain or lose on your investment at the specific leverage and your stop-loss order and limit to exit order.   Always remember that all trading – including Forex – is inherently risky.  But you can cut back on this risk by following sound habits like doing research, using a regulated broker, and seeing limits in advance.

If you talk to any experienced Forex trader, the trader is going to have plenty of stories about major losses – even when all the tips and trends said that the trade was going to bring a major profit.  Before you get too caught up in all of those Forex review websites (even the ones with great reviews and success histories), it is important to realize that there is ALWAYS risk with Forex trading!  Don’t ever put too much of your investment into a single trade!

In order to successfully trade on Forex, you must have a risk management plan.  Under your plan, you should set an amount which you will trade.  Of course, the amount which is considered reasonable varies per trader.  Some traders will only risk .5% of their account whereas others will risk half.  Let’s take an example where a trader has $5000 in the Forex trading account.  If the trader decides to risk $2500 on a single trade and it goes well, then there can be substantial profits. But, if the trade goes bad, then the trader will be left with just $2500 in the account.  If that same trader risks half the account again and fails, then there will only be $1250 in the account.  With high-risk Forex trading, you are severely limiting the number of bad trades you can have without wiping out your account.  At the same time, you are increasing the amount of successful trades you must have just to recoup your loss.

Most experts recommend risking no more than 5% of your Forex trading account.  With this amount, you can have multiple losses without depleting your account.  At the same time, a single good trade and recoup a substantial amount of any losses or represent significant profits.

The only time that you should be risking large percentages of your Forex account is if you have personally been following a trade for a long time and are very sure that it will reap you benefits.  Do not base your assurances on the tips found at Forex websites or any so-called insider advice.  The decision to make a large risk trade should be based on your own personal knowledge and experience only!

It is a good idea to practice Forex trading with virtual “fake” money accounts first.  But keep in mind that these virtual accounts are not always indicative of real Forex trading because of “slippage.”  Slippage refers to the price difference which a broker gives you, blaming the worse price on the swiftly-moving market.  You could easily get burned for a few pips to up to 20 pips due to slippage!  Demo accounts also respond to spikes (sudden changes in currency prices) better than real Forex trading accounts.  If you did well on your demo Forex account, make sure that you using extra caution when you start out with real Forex trading just to make sure you are in control of the slippage and spikes.

What many new Forex traders don’t realize is that no money is ever actually being traded on the market.  Instead, the market is complete speculation with the changes in values, profits and losses only existing as computer entries.  While these computer entries may not really represent any actual exchanges, the figures still have a major impact on the global economy.

The foreign exchange market exists to regulate the exchanging of the major world currencies by sectors (mostly banks) which rely on foreign currency exchange. Other than banks, global companies who make payments in foreign currencies also heavily rely on Forex.

The Forex trading market is dominated by the US dollar.  More than 8 out of every 10 Forex trades occur with the US dollar, most of which are paired with the Euro.  EUR/USD trades account for nearly 30% of all the Forex trading on the market. After this, USD/JPY and GBP/USD are the next most popular trades in the foreign currency exchange market.  These 3 currency pairs are more stable than the currencies of smaller countries or certain regions.  Some currency pairs are associated with a specific commodity.  For example, AUD/USD is linked to the gold commodity and USD/CAD is linked to the oil commodity.

The major currencies in Forex trading are:

• Australian dollars (AUD), nicknamed “Aussie”
• Canadian dollars (CAD), nicknamed “Loonie”
• Euros (EUR), nicknamed “Fiber”
• Japanese Yen (JPY), nicknamed “Yen”
• British pounds (GBP), nicknamed “Cable”
• Swiss Francs (CHF), nicknamed “Swissy”
• United States Dollars (USD), nicknamed “Buck”

Forex currencies are listed according to the ISO 4217, or the Codes for the Representation of Currencies and Funds.  Under the ISO 4217 standards, the first 2 letters represent the country and the last letter represents the name of the currency.  In cases where the currency is independent of the nation, the country is listed as X.  For example, the code for Central Caribbean dollars is XCD.  “X” can also be used for special situations, like the exchange rate for gold commodities.

You can trade Forex in any currency you wish.  However, it is a good idea to start Forex trading with the major 7 currencies listed above as they are most stable.  But, you will also want to make sure that you choose currency pairs which you can easily follow.  If you primarily keep track of the US and European markets, then you should not trade in Canadian dollars (though you will need to follow all global markets to be truly successful in Forex trading).  If you live in a country like Hungary, for example, then it may make sense to trade in your local currency as you have more insight to market trends, even if the Hungarian forint is more volatile than the other Forex currencies.

In investing, leverage is used to increase the amount that can be returned on the investment.  With foreign currency exchange (Forex) trading, leverage occurs when the trader borrows moneys from a broker and uses the funds for the specific purpose of Forex trading.

Thanks to the leverage system of Forex trading, traders can make small investments but still have access to large amounts of funds.  It is typical for a Forex broker to offer 1 to 100 ratios for contracts.  Under this situation, an investment of $1000 would be worth $100,000.  Compared to other investments, this is a very high amount.  It is even common to find leverage as high as 1 to 200, though this is usually for amounts of under $50,000. With equities, for example, traders must have at least half of the monetary value of trades. Thus, Forex trading becomes profitable while still minimizing risk.

Because the leverage of Forex trading is so high, it is also high risk.  With equities, for example, the leverage is usually 1 to 2.  With futures, the leverage is usually 1 to 15. However, Forex trading is not so risky once you consider that most foreign currencies don’t change by more than 1% daily.  Unless there is a massive collapse of a currency, it is unlikely that you will experience a huge loss.  On the other hand, equity and future trades can easily change by 10% daily.

Forex brokers will usually have a minimum amount requirement, known as the initial margin.  When you deposit this amount, then you will be allowed to start Forex trading through the broker.  The Forex broker will also determine the amount which is required per position (called a “lot”) which gets traded.  For example, if you have an initial margin of $2,000, you may be able to trade 2 lots of $100,000, or $200,000 total.   Because the amount of the lot is so much greater than the initial margin, Forex traders have the benefit of controlling large amounts of money with little risk but still the change to have large rates of return.

Here is an example of how leverage margins can work in your advantage with Forex trading:

You have an initial investment of $2000 in a 1: 100 margin account, so you are given the purchasing powers of $200,000.  You use this purchasing power for a trade of EUR/USD at USD/CAD 1.0210 (which means you buy 1.0210 Canadian dollars for each 1 US dollar) and sell at the price of 1.0201.

Since you have such as high margin, you are in control of CA$204,200.  With the sell price of 1.0201, you calculate (204,200/1.0201) and get $200,176, which is profit of $176.  The rate of return on your investment is calculated (176/2000×100%) and is 8.8%.

Compared to other markets, the high leverage of Forex trading allows you to get a much higher rate of return on your investment.  If you took this same example above but without the 1: 100 leverage, you would only have the purchasing power of CA$2,042 and get a return of (2,042/1.0201) US$2,001.76, a profit of just $1.76.  This rate of return is only 0.088%.

With trading on the foreign currency exchange market, the currencies are always going to be listed as a pair.  Each currency has its own three-letter symbol, most of which are obvious, such as USD for United States dollars. A currency pair for US dollars and British pounds looks like USD/GBP.  Some Forex trading platforms list the currency pairs without the slash so a pair may look like USDGBP.

The first currency in the pair is known as the base and the second is the quote or counter currency.  The currency pairs are always listed in terms of the base currency so the base will have the value of 1.  The quote is given in relation to its value compared to the base.  The value will always be given as two numbers. The first is the bidding (selling) price and the second is the asking (buying) price. For example, if you ask for the quote of EUR/USD, you may be told 1.2957/61.  In this case, you could sell Euros for $1.2957 or buy Euros for $1.2961.

The reason that there is always a difference between the buying and selling price of currencies (known as the spread) is because this is how the Forex brokers make money. They will not take a commission from your earnings but they will always profit from your exchanges because of this spread.

One of the most important concepts with Forex trading is “pips.”  A pip is a math term for the last decimal point in a quote.  Your profits and losses are measured in changes of pips.  For example, if your currency pair goes up by one pip, your investment of $1000 may earn $10.   Keep in mind that each currency has its own pip value.  With USD, the pip is the fourth decimal point (in our example earlier, the pip is the “7” of the 1.2957).  With Japanese yen, the pip is the second decimal point.  For example, if the bid quote of EUR/JPY is 99.61, the pip is 1.

Here are some examples of Forex trading quotes and what they mean.

AUD/CAD 1.0410/1.0447

The base currency is Australian dollars, the quote is Canadian dollars.

Bid price is 1.0410, when selling Australian dollars, AU$1 = CA$1.0410

Ask price is 1.0447; when buying Canadian dollars, AU$1 = CA$1.0447

The spread is 0.0037

The pip value is 0.0001

 

CAD/CHF 0.9188/0.9216

The base currency is Canadian dollars, the quote is Swiss francs.

Bid price is 0.9188; when selling Canadian dollars, CA$1 = 0.99188 Swiss francs

Ask price is 0.9216; when buying Swiss francs, CA$1=0.9216 Swiss francs

The spread is 0.0028

The pip is 0.0001

 

GBP/AUD 1.5181/1.5228

The base currency is British pounds, the quote is Australian dollars

Bid price is 1.5181; when selling British pounds, 1 pound = AU$1.5181

Ask price is 1.5228; when buying British pounds, 1 pound = AU$1.5228

The spread is 0.0047

The pip is 0.0001

 

CHF/JPY 81.80/82.21

The base currency is Swiss francs, the quote is Japanese yen

Bid price is 81.80; when selling Swiss francs, 1 Swiss franc = 81.80 Japanese yen

Ask price is 82.21; when buying Swiss francs, 1 Swiss franc= 8.21 Japanese yen

The spread is 0.41

The pip is 0.01

USD/CAD 1.0210/1.0222

The base currency is US dollars, the quote is Canadian dollars

Bid price is 1.0210; when selling US dollars, US$1 = CA$1.0210

Ask price is 1.0222; when buying US dollars, US$1 = CA$1.0222

The spread is 0.0012

The pip is 0.0001

In the past, individual investors focused on stock options, futures, and commodities.  Now, increasingly more individuals are starting to trade on the foreign currency exchange market. When you look over the advantages of Forex trading, it is easy to understand why this market is becoming so much more popular.

On a basic level, Forex trading is much more accessible to individuals than other types of trading.  The foreign exchange market is open 24 hours a day so, even if you have a day job, you can still take advantage of this market.  The 24 hour market also makes it possible to respond to trends as they occur.  Forex trading also is possible with a much lesser investment than with other markets. With a mini Forex trading account, you can enter the market with just a couple hundred dollars or the equivalent.

A small investment on the Forex trading market can put you in charge of a very large amount of money.  This is because of the high leverage margin of Forex trading. Typically, margins are in 100 to 1 but can go as high as 200 to 1.  That means a $1000 investment would typically put you in charge of $100,000.  Each pip of the chosen currency pair would be equal to $1 of gains or loss. For a contract which has you in charge of $100,000, a single pip would be worth $10.

This margin is what gives Forex trading its advantage.  With a trading margin of 100 to 1, an investment of $1000 could result in a profit of $1000 with just a 1% profit.  Do keep in mind that currencies don’t usually move more than 1% daily, unlike stock markets which can jump or fall over 10% daily.

Unlike stock markets which depend on upwards trends, traders can make money with the Forex market in upwards and in downwards trends.  While there is still risk with Forex trading (as with any trading), this market can be entered with less risk so long as the trader follows good habits.

Before you start Forex trading, it is wise to practice online with virtual “fake” money first.  Try numerous trades for at least a week, ideally a month period.  See how well you do and learn from your mistakes before they start costing you your real money.  Most reputable Forex trading websites will have programs which let you simulate trades in real time so you can get experience before you start on the market.

If you are interested in trading on the Foreign Currency Exchange (FOREX) market, then you have probably heard the stories of people who become millionaires while working from their homes.  These stories are not exaggerations – there really is millions to be earned with Forex trading.  But the truth is that 70% of Forex traders are going to lose money.  If you want to put yourself up with the top 30% who are making it big, then you will have to do a lot of research to make sure you know what you are doing.

The Forex market is larger than any other trading market worldwide with nearly $2 trillion being turned over every day.  To put this amount in perspective, it is about 30x more than all of the equity trading in the US.

Forex trading involves the trading of a pair of currencies which are bought and sold against each other.  One example of a Forex trading currency pair is USDEUR, which refers to US dollars and Euros.  All of the major world currencies are traded on the Forex market with the most popular trades occurring in US dollars, Euros, Swiss francs, British pounds, Australian dollars, and Japanese yen.  In a currency pair, the first currency is called the base and the second is the counter, also called the quote.  The quote is always given in terms of the base currency.  Quotes consist of two prices.  The first is the bidding (selling) price and the second is the asking (buying) price.

Currency quotes are frequently changing.  These changes in the rates are known as pips.  A trader’s command of predicting pips is key to making money on with Forex trading. What is unique about the Forex market is that traders can react to any market fluctuations 24 hours a day, every day with the exception of weekends. This means that an attuned Forex trader can take advantage of an opportunity if he/she finds out market news (like a political event), even if it is the middle of the night.

When you invest in a trade, you trade at a certain margin requirement but also have a stop-loss order.  The stop-loss order is to protect you against too much loss.  If your currency pair goes below a certain amount of pips, then you remove your assets.  You also can have a limit order amount for when you are profiting. With the right risk/reward amount, you can make it so you will be more likely to profit even if your predictions are wrong most of the time.

Forex trading is not like stocks because Forex traders are high leverage, usually in the 100s.  For example, if you invest $2,000, you could control $200,000 and have increasing profits accordingly.  There are some miniature Forex trading markets where you only need to have investments equaling $100.  This makes Forex trading more accessible to all people.