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How a forex trade works

When you trade in the foreign exchange you essentially swap currency. What that means is you buy one unit of currency and sell another. The reason you do this is because you expect the currency you buy to rise in value and you intend to sell it for a profit once its value rises. This is called taking a long position. The opposite of taking a long position would be taking a short position, which would be selling a currency because you believe it will fall in value.

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Forex trading is always done in pairs; as such, your trading decisions are always made based on the value of one currency in relation to another. Currencies are paired using the 3-letter symbol that represents their currency (i.e EUR for Euros, USD for United States dollar, GBP for British pound, JPY for Japanese yen). In a quoted pair the base currency is represented first and the quote currency second. The quote currency tells you the amount of that currency needed in order to purchase 1 unit of the base currency. If, for example the ask price associated with GBP/USD is 1.9755 it means you can buy £1 GBP for $ 1.9755 USD.

At the start of a forex trade you will be opening a position either by going “long” or “short” in a currency. That means you will open a position either by making a decision to buy a currency because you expect its value to increase, or by selling a currency because you expect its value to decrease. You will make a decision on a currency pair based on believing the quote currency will rise or fall in price value. Whatever decision you make, whether to go long (buy) or short (sell), you open a position when you act on the decision. It is important to pick the right time to enter a position and also important to pick the right time to close, or exit, an open position. This is how you go about making money in forex trading, predicting accurately about whether the value of a currency will rise or fall and choosing the right time to buy or sell based on your prediction.

Unfortunately, there are no red lights that flash to let you know the right time to open a position or the right time to close a position. This is where some type of strategy will come in.

Devising forex trading strategies requires sufficient knowledge of forex trading which beginners generally do not possess. As such people new to forex trading are frequently the target of forex scams and lose a bit of money before they even start trading by purchasing products that come with promises to teach them fail safe strategies for trading. Most experts in the trading business agree that there is no fail safe forex trading strategy. However, it is recommended that you have a set of rules in place for how you trade and that you always stick to those rules. So once you come up with a system for deciding when you open a position and when you close a position, it’s important to stick with your system, unless it’s a consistently failing system in which case you might want to modify it a bit until you find a system that isn’t consistently failing. Once you find a system that works, stick with it understanding it will never work 100% of the time.

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Asides

  • Wondering if online forex trading is genuine? The answer is yes, online forex trading is genuine. However, not all forex brokers are reputable. Online forex brokers who operate dealing desk operations should usually be avoided as they are believed to make their money by trading against you so you are pretty much guaranteed to lose your money. Look for brokers who run no dealing desk operations or a forex Electronic Communications Network otherwise known as an ECN.  The reason more everyday individual forex traders use a retail forex broker instead of trading via an ECN which is regarded the most ideal way to trade forex online, is that retail brokers usually have smaller minimum balances and many new traders can only afford a small initial deposit.

  • If you are new to forex trading and wondering what is a forex trading account and how to get one, a forex trading account is an account that you apply for with an online retail forex broker. Your account allows you to trade forex online at any time of day or night from Sunday at 5:00PM EST to Friday at 4:00PM EST.

    You will usually have to fill out an application and submit evidence of your identification to obtain an account with any reputable forex broker. Your application will be reviewed and once accepted you will then have to fund your account in order to begin trading forex. Different brokers have different limits on the amount that you need in order to establish a live account forex trading.

  • FX is just another term for forex and fx online trading refers to forex trading conducted via the Internet. The Internet has made forex trading accessible to the masses. Once upon a time  the fx trading market was restricted to participants trading on the interbank level and other well-financed players. Today, every day indivuduals are trading forex via one or another online forex trading platform thanks to the services provided by retail forex brokers.

  • Day Trading is an investing term. It refers to the act of buying and selling financial instruments within the same trading day, which means your trade does not carry over into another trading day. You open and close positions all in the same trading day.

    Forex is a short form of foreign exchange and foreign exchange refers to the financial market wherein currencies are exchanged or traded.

    Currency when referenced in the context of day trading forex refers to the money of one country that gets exchanged or traded for the money of another country.

  • Don’t expect to be able to predict what’s going to happen in the forex market. The forex market is unpredictable. Just when you think you have the market figured out, it does the exact opposite of what you expect it to do based on your previously drawn conclusions.

  • When you consider that even professional forex traders lose money it should give you a good enough idea that forex trading is not Math or Science. There isn’t a formula that  will yield profit 100% of the time like adding 1 + 1 must yield 2 100% of the time.

  • Some forex analysts recently forecast that that euro would be trading at 1.45 USD within a few months and if things continue on their current path these analysts will have projected accurately. The EURUSD rate is currently fluctuating between a day low of 1.4697 and a day high of 1.4828 August 13th, 2008.

  • The US dollar is starting to let up a bit, and analysts expect the majors to do some climbing back after dropping significantly against the USD over the last couple of weeks; however the expectation is for the majors to drop again.

    Get some trading ideas from expert strategists who are following the USD currency trading drama.
    Forex Market Prepares For Dollar Strength Correction

  • FXCM Trading Station II is probably one of the best forex trading platforms out there for novice traders. It’s fairly easy to use. In fact it’s such a nice system even Deutsche Bank uses it with their DBFX trading station. But in the case of FXCM don’t expect the trading station to behave exactly the same in live mode as in demo mode. There is definitely a difference even though you can’t see the difference structually. Even FXCM admitted the live mode and demo mode aren’t exactly the same. They look the same but your trading experience while in demo mode will be a lot more profitable than while in live mode. That should make you wonder. They say it’s the slippage and volatility but in demo mode you’re almost always profiting. In live mode almost always losing….

  • The truth is you probably won’t get rich trading forex. Successful forex traders understand the foreign exchange market and currency trading on a level that is not understood by the average retail forex trader. If you don’t actually understand the fundamentals or even the technicals for that matter you’re going to find it’s a lot more difficult to make a profit from your fx trading account; but even though it will be difficult it’s not impossible. You probably won’t join the forex millionaires club,  but you can still make decent money.

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Here is a video that aims to demonstrate how you can make money trading currencies using Fibonacci Retracements and Fibonacci Profit Targets.

This video demonstrates a method for making money in the foreign exchange market using pivot points. Pivot points are turning points.

In the forex market the term would apply to the the points throughout the previous trading day at which traders and investors leaned towards a bull market or a bear market in general sentiment.

Ken Calhoun with forexonfire.com talks about how you can learn the technical signals to use and how to spot pivots, break outs, break downs using currency pairs when reading your charts, and how to setup your charts for currency trading.

He talks about currency pair volatility, learning how to spot patterns, pivot points, learning when to exit and not initiate another trade.

Here is an educational video of sorts put out by the guys gftforex.com. The video aims to teach you how to spot forex options scams centered around advisory services and newsletters ect. It is very detailed and straightforward.

The video suggests that your scam siren should definitely start going off if anyone comes trying to sell you on forex options trading by promising they have a system that is:

Easy
Low Risk
Based on secret trading methods used by the pros which the pros don’t want you to know
Available to you even if you don’t have lots of money thanks to leverage.

A look at forex trading. This video attempts to take the mystery out of foreign exchange by breaking it down into it’s “principal parts and players”.

The video explains how foreign currency is brought to other countries and how this creates the practice of currency trading. The video addresses the role central banks of countries, commercial banks, financial companies and brokerage houses, and private individuals play in the foreign exchange markets.

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