FOREX Trading - an Easy Explanation

 

 

A frequently asked question about forex trading is:

 

Now how does this actually works?

 

 

The word Forex is an acronym for Foreign Exchange.

 

It refers to foreign money (the money of other countries) that needs to be exchanged for that of some other country.

 

 

Why do you need to exchange money?

 

Because if you were in possession of foreign money for example USD = $, you can do almost nothing with it if you are not in the USA. In most countries it will be unusable.

 

You need to exchange it for the local money of the country (South African Rands = ZAR) where you want to use it before local people will accept it from you as payment for a product or a service.

 

 

What are the main reasons for the exchange of money?

 

  • To pay for imports the overseas people would prefer to receive payment in their own currency.

  •  To do international investments.

  •  To repay international loans.

  •  To pay for services.

  •  Tourism.

 

Each currency has got a certain value.

 

How do we measure the value of a currency?

 

 

 

By measuring it against the value of another currency.

 

The value of one currency may not be the same as that of another currency.

It can be more or less.

 

 

 

For example:

 

R1.00 (ZAR) is not equal to $1.00 (USD)

 

1 South African Rand (ZAR) = 0.13425 US Dollar (USD)

1 US Dollar (USD)              = 7.44865 South African Rand (ZAR)

(Value date : 2009/10/24)

 

 

The value of a currency as compared to other currencies will fluctuate and change the whole time.

 

 

 

 

We can use these daily fluctuations in the value of different currencies to make a profit. By buying the currency that is getting stronger, we will get more money back when we close a trade after a while. A trade transaction can last anything from a few seconds (called scalping) to several hours or even days. It is your decision when to activate or close a trade.

 

 

The value of a currency is determined by the forces of supply and demand:

 

The more people that need to buy a certain currency (to pay for imports, investments, loans, tourism, services) the stronger that currency will become.

 

If people are not interested in buying a certain currency, that currency will lose value.

 

Especially when people start to get rid of a certain currency, that currency will lose even more of its value.

 

A good example here is the Zim $ which lost a lot of value over the past few years.

 

 

The change in value of a certain currency is affected by :

  • Things happening in the world war, acts of terrorism, natural disasters we call these things fundamentals.

  • Fundamental Announcements announcements by governments regarding the financial and economic well being of their country.

  • Banks doing large transactions.

  • Speculation.

 

Forex trading is to speculate with the exchange rates of different currencies.

 

 

Before you can start to trade, it is highly recommended that you must apply for a free demo trading account which you will use to practice on and to get comfortable with using the software.

 

The benefit of the demo trading is that it will give you a good idea of how forex trading works. You can experiment with absolutely no risk (because you will be trading with virtual money) - you can lose nothing! There also is no cost involved in the demo trading. The software and data feed is available for free!

 

You will find the names of more than 20 highly reputable forex companies on this website. You can apply for a free demo trading account with any of them.

 

The trading software can be downloaded and used for free!

 

There are different versions of the trading software available, there is software for pc's, Mac's, android cell phones, i-macs and tablets.

 

We prefer to use the Metatrader 4 software at the moment. The reasons are:

  • It is easy to use,

  • It is very powerful,

  • It is programmable (you can develop your own indicators and trading strategies if you have programming experience).

  • It is being used by many companies. The benefit of this is that if you decide to switch companies for any reason, there will be no need to learn to use new software. You will use the very same software at the other company.

The next important thing to do is to develop your knowledge and skill.

 

You will find that some of the companies listed on this website have free training available - you will find more information on this website about the free training.

 

Sign up for the free training and get a better understanding of the markets before you even consider it to trade with real money.

 

If you realize that you will need personal training to better understand the market movements and to develop your skill as a trader, you are welcome to contact me for quality training. After the training you will demo trade to develop your skill. Only when happy with your results will you go to the next step, and that is to apply for a live trading account.

 

Before you can start to trade, you will have to apply for a forex trading account and deposit some money there, as you will be using your own money to trade with.

 

The process of opening a live trading account is very easy, and can be summed up in a few steps:

 

1. Complete and submit the online application form. You will then receive a confirmation email with your account number, password and other important information.

2. Upload / email a copy of your ID or Passport.

3. Upload / email a proof of residence document - it can be a utility bill like a municipality bill or telephone bill. It must show your street address. You can also use a bank statement with your street address on it.

4. You must use one of the available methods to transfer money to your live trading account.

 

There are 3 types of accounts available (not all types are available at all brokers):

 

  1. The normal or standard account which is also called a professional account at some brokers.

Deposit amount: $2,000.00 and up.

Smallest trade: $1,000.00 per transaction.

Pip value: It is 1% of the amount you trade with. If you are trading with $1,000.00 then the pipvalue will be $10.00 (which is 1% of $1,000.00).

(A Pip is 1/100 of a cent.)

2. A Mini Account.

Deposit amount: Any amount from $300.00 and up and less than $2,000.00.

Smallest trade: $100.00 per transaction.

Pip value: It is 1% of the amount you trade with. If you are trading with $100.00 then the pipvalue will be $1.00 (which is 1% of $100.00).

(A Pip is 1/100 of a cent.)

 

3. A Micro Account.

Deposit amount: Any amount from $100.00 and up and less than $2,000.00.

Smallest trade: $10.00 per transaction.

Pip value: It is 1% of the amount you trade with. If you are trading with $10.00 then the pipvalue will be $0.10 (which is 1% of $10.00).

(A Pip is 1/100 of a cent.)

 

As soon as you receive confirmation that the account has been opened and you can see your money in your account, you can start trading.

 

 

The process of trading:

 

We sit in front of a computer looking at graphs of the various currency combinations.

 

By keeping fundamental factors in mind (fundamental trading) and by looking at patterns in the candles as well as a combinations of indicators (technical trading) we aim to determine the direction of the market and will decide when is the best time to buy or sell.

 

Our main aim is to determine if the value of a certain currency as compared to another one is getting stronger or weaker.

 

Our aim is to invest in the currency that is getting stronger.

 

 

To Activate a trade:

 

If a currency is getting stronger (= the graph is moving upwards), we will buy it.

If it is getting weaker (= the graph is moving downwards), we will sell it.

 

You will right-click on the graph and select Trading / New Order in the popup menu

 

 

(or press the F9 key) to activate the Order window where you will click on the Buy or Sell button to activate a trade.

 

 

Symbol = the currency combination you are going to trade

Volume = the amount of money you are going to trade with

Volume 0.01 = $10.00

Volume 0.02 = $20.00

Volume 0.03 = $30.00

etc.

Volume 0.10 = $100.00

Volume 0.20 = $200.00

Volume 0.30 = $300.00

etc.

Volume 1.00 = $1,000.00

Volume 2.00 = $2,000.00

Volume 3.00 = $3,000.00

etc.

Stop Loss = a way of protecting yourself when in a trade by placing an order of where a trade should be closed if the market starts to move against you.

Take Profit = a place where you would like the trade to be closed in a profitable situation.

 

If a graph is moving higher, we will activate a Buy transaction. (Blue button)

If a graph is moving lower, we will activate a Sell transaction. (Red button)

 

When you activate a trade, a green dotted line will be visible on the graph to show where the entry is. If you enter a Stop Loss or a Take Profit, it will be visible as red dotted lines.

 

You can also see the active trade in the Terminal Window (Trade Tab) on the bottom of the screen.

 

To Close a trade:

 

Right-click in the Terminal Window (Trade Tab) on the active trade and select Close Trade. You can also double click on the active trade and the Order window will appear with a Yellow bar below the Sell and Buy buttons. Click on the Yellow bar to close the trade.

 

 

 

The nice thing about forex trading is that we buy from the brokerage and we sell back to the brokerage where our accounts are.

 

There is no need to run around looking for potential clients to convince to buy from us.

 

During and after every trade you will be able to see your saldo in the Account History Tab of the Terminal Window.

 

This is a very simplistic explanation of the procedure. We did not talk about Lots, Margins, Leverage and other important stuff in this article. More about those later on.

 

 

 

>>> Click here to learn more about the advantages of trading Forex

 

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Disclaimer

 

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

 

Copyright 2013, FOREX MASTERS