How
do you make money from trading Forex?
Just like any investor may purchase a commodity
or share in hope that its value will increase,
so is the case with Forex. All Forex is quoted
in currency pairs, which is the amount that a
single unit of one currency can buy in the other
currency. So in order to make a profit in Forex
trading, a trader must convert out of a weak currency
into a strong currency (by selling their original
currency and purchasing the targetted currency
i.e. the "strong" currency), wait for
the strong currency to appreciate and then lock
in their profit by selling it and purchasing their
original currency back. Just like an investor
may purchase gold with cash in hope that the value
of the gold will increase, so that they can then
sell it for a profit - the concept for Forex trading
is no different. To add a further degree to this,
Forex can also be "short-sold" just
like Futures - i.e. you can profit by selling
a weakening currency and then realise your profit
by "closing" your position and purchasing
it back.
The
currencies that entry/exit signals are given for
and thus traded here are the Swiss Franc (USD/CHF),
Euro (EUR/USD), Great Britain
Pound (GBP/USD) and the Japanese
Yen (USD/JPY) - all to the US
dollar. These four currencies provide all the
trading potential that is required. Most traders
will however specialise in only one or two currencies
throughout their trading day.
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How
is Forex Quoted?
Currencies are quoted in pairs - eg USD/CHF. The
first currency that appears is called the "base"
currency, with the second known as the "counter"
currency. The number that comes from this basically
means the amount of the counter currency that
can be purchased with one unit of the base currency,
expressed in the counter currency - E.g. a USD/CHF
rate of 1.5664, means that one US dollar can purchase
1.5664 francs. In trading, usually the US dollar
will be quoted as the base currency, apart from
some European and Colonial countries, which quote
the other way.
Wholesale
Forex transactions don't have "costs"
as such, however the rate that you can sell and
buy is not the same and this is referred to as
the bid/ask spread. The "bid" price
is the amount that the market maker (i.e. the
bank etc) will pay you in order to buy the base
currency from you, so you end up with the counter
currency - E.g. a USD/CHF bid rate of 1.5664 means
that you have US dollars to sell and the bank
will buy those US dollars in exchange for francs,
by giving 1.5664 francs for every dollar you give
them. So the "ask" price is the rate
that the bank will sell you the base currency,
in exchange for the counter currency. So if you
are looking at the bid rate, you have base currency
you want to convert into the counter currency,
and if you are looking at the ask rate, you have
counter currency you want to convert into the
base currency. The difference in the bid and ask
prices is the "spread". So in order
to make any profit in FX trading, you will at
least need to firstly cover this bid/ask spread
through a profitable move.
All
currencies are quoted in 5 digits, with the smallest
digit being called a "pip" - E.g. a
bid/ask spread of 1.5664/1.5668 USD/CHF shows
a spread of four pips. Example is if a trader
has US dollars, he/she will be given 1.5664 francs
per US dollar, however the trader will need to
give the bank 1.5668 francs to get one dollar
back.
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Margin
Again, as with futures, the margin is a "performance
bond" or good-faith equity set aside to allow
a trader to trade currency. Currency margins offered
here are 1% or 100:1 against the underlying contract,
so a US$100,000 underlying contract can be traded
for $1,000 (with FXCM trading platform margins
are 1% - margins with PFG Trading Platform for
forex are 2.5%). Rules around sufficient margin
remaining in the traders account to cover a loss
are the same as for futures.
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Day-trading
The Forex Trading system does allow a trader to
hold positions for two days. Holding a position
for any longer than this does however incur costs
to "rollover" a contract. When using
the RTTC system for Forex Trading, positions are
typically only held for a matter of minutes to
hours, so the idea of trading within the day is
virtually the same for forex as is with futures.
The
foreign exchange market is open 24 hours a day,
however there are times that are better suited
to trading forex. The best time to trade
is around the opening hours of the London market
which creates a window from 6.00pm EST till approx
4.00am EST - for Australia (current time offset
with daylight savings - UTC/GMT +11 hours - and
while daylight savings is off - UTC/GMT +10 hours)
- or for New Zealand 8.00pm NZST till 6.00am NZST
- (current time offset with daylight savings -
UTC/GMT +13 hours - and while daylight savings
is off - UTC/GMT +12 hours). The London market
trading times will produce the most stable moves
in each of the main currencies traded. During
the last session of the London market, there will
be a cross-over with the opening of the US market
which will increase the volatility of trades.
It is recommended to be cautious at this time
and not trade after the London market has closed.
Further
details on the Forex Trading System
The
minimum account balance required to open a Forex
Capital Markets Trading Account is US$2,000 with
1% margins - so this can be more accessible to
some traders than the slightly larger futures
account requirement. They also offer a smaller
version of the FX trading account called a "mini",
which can be opened for US$300 and has 0.5% margins,
however this is only really to give a trader a
"feel" for the market in a practical
sense.
Stop-loss
and profit-limit techniques are the same as for
Futures and the system is much more flexible in
allowing a trade to run its own course while a
trader can set their trade and walk away from
the computer.
The
forex market is open 24 hours per day, with the
Forex Trading Desk and Trading Platform functional
from Sunday 5.00pm New York Time until 4.00pm
Friday New York Time. The best times to trade
forex are mentioned above.
There
is a separate trading platform specifically for
Forex Trading.
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