What
is Forex
Trading?
Forex trading is a trade of one
country’s currency for another at a certain exchange rate. The
exchange rate, often called a price, can be the result of supply
and demand for the currency in the open market, but it can also
be a fixed value set by government fiat.
Forex trading may be as rudimentary as when two individuals
exchange dollars for euros on the street enabling a tourist to
call from a phone booth in Hungary, for example. The more
sophisticated Forex trading experience is in the interbank
market. The interbank market is not a single location; like the
Internet it is accessible from millions of locations. Forex
trading in the interbank market lies in the complex network of
the world’s banks.
From the beginning,
Forex trading has been done in two
forms — over-the-counter cash trading, and currency futures and
options trading in a currency exchange. The Forex trading
broker operates in both markets; you as an individual investor
probably are familiar only with cash trading.
Forex trading, whether over-the-counter or futures, is very
exciting. The amount of leverage allowed you is what enlivens Forex trading. Forex trading in futures can have a
leverage ratio of 10 to 1, or more. But over-the-counter Forex trading can have leverage ratios as high as 100 to 1.
Admittedly, leverage is a double-edged sword, but this huge
leverage can make minor price fluctuations in Forex trading
seem tremendous to the bottom line — in profits and, more
importantly, losses.
When companies promote
Forex trading, they typically put
emphasis only on the over-the-counter cash market. This is
limiting. Since Forex trading exists in two forms
simultaneously, the over-the-counter cash market and the futures
market, small speculators actually have access to a lot of the
same Forex trading capabilities as large banking
institutions. This capability is something unique, not to be
found in other investment opportunities.
The capability for simultaneous
Forex trading in the two
markets places you on a level with hedgers. Large speculators
and investment funds trade both sides of Forex with great
ease. They know there is no easy way to predict the direction of
the over-the-counter Forex market, but once a direction has
been set you can rely on the market movement. They are also
aware that all Forex trading is a zero-sum game: if you
win, someone else loses money.
Having such considerations in mind, the big players long ago
realised that Forex trading requires discipline, and that
disciplined Forex trading requires them to explore all of
their options. This is the only route to success. Being a small
speculator, you will have to be equally disciplined, if not more
so. The keys to that discipline would be:
First, prepare for the losing trades. There are many small
speculators who put all of their limited risk capital in one
trade. Several more will add to losing trades. Some of these
will actually try to fight against the market. You must try to
avoid traps like these.
Second,
prepare for the winning trades. In Forex or FX
trading, you should not be afraid — and should not forget
— to lock in the profits from a winning trade with a futures or
options Forex contract. You will want to avoid getting caught
in a currency reversal and having to give back profits.
Lastly, have faith in yourself and your decision-making process.
Don’t wait for your sure-fire trade to prove itself and in the
process miss out on all the profits by picking the top of a
market.
Remember that every preventable mistake in
Forex trading
finds its roots in two emotions, fear and greed. Small
speculators consistently react with either one of these
emotions, thus setting themselves up for failure by leaving no
room for discipline. |
